On Dec 3, 2015, we issued an updated research report on Rhode Island-based pharmacy retail giant CVS Health Corp. CVS, which provides integrated offerings across the entire spectrum of pharmacy care.
CVS Health posted a solid third-quarter 2015 with revenues comfortably beating the Zacks Consensus Estimate. Pharmacy Services benefited from growth in specialty pharmacy business while Retail Pharmacy gained from increased same-store sales. Further, the recently completed $12.7 billion mega acquisition of Omnicare reflects the company’s foray into the fast growing long-term specialty care market.
Despite tough pricing competition, CVS is gaining well on its 2016 selling season reflecting high levels of service and execution, competitive pricing along with an unique integrated model that allows the company to provide differentiated products and services, which generate savings and promise better health outcomes and convenience.
Gross new business wins for 2016, pegged at $13.3 billion, is spread across all client segments while net new business stands at $11.4 billion. To date, the company has completed nearly 80% of client renewals for 2016 and has already seen strong retention rate of about 98%.
Meanwhile, the soaring demand for specialty pharmacy, especially in the ongoing decade, is likely to accelerate growth for the company. Specialty revenues retain a strong growth trajectory (up 32% in the reported quarter), driven by claims growth, inflation and the inclusion of Omnicare's complementary specialty business. Currently, the company is working on integration of Omnicare’s specialty operation into the company’s existing specialty business.
Moreover, we are optimistic about domestic demographic trends, which are expected to drive utilization rates further as the population ages. This will facilitate retail pharmacy operators like CVS Health to grow and capture increased market share in the days ahead.
However, rising pressure to reduce reimbursement rates for generic drugs, along with a highly competitive market, offers stiff challenges to CVS Health. Also, the sluggish economic conditions in the U.S. might hamper the company’s profit margin.
The stock currently has a Zacks Rank #3 (Hold).
Key Picks from the Sector
Retail-drug stocks such as GW Pharmaceuticals plc GWPH, ICU Medical, Inc. ICUI and INSYS Therapeutics, Inc. INSY are worth a look. All the three stocks carry a Zacks Rank #2 (Buy).
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