CVS Reaffirms Its Growth Momentum At Its 2014 Analyst Day

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At its annual analyst day held earlier this week, CVS Health (NYSE:CVS) reaffirmed its previously announced 2014 guidance, provided its outlook for fiscal 2015 and reviewed its 5-year steady state targets. The company also announced a 27% increase in its quarterly dividend, to $0.35 per share, and a new share repurchase program for up to $10 billion of the company’s outstanding common stock. (Read Press Release)

2014 Guidance

– Adjusted EPS of $4.47 to $4.50.

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– GAAP diluted EPS from continuing operation in the range of $3.93 to $3.96.

2015 Outlook

– Adjusted EPS in the range of $5.05 to $5.19, up 12.5% to 15.75% (excluding the loss on early extinguishment of debt in 2014)

– GAAP diluted EPS from continuing operation in the range of $4.77 to $4.91.

– Free cash flow between $5.9 billion to $6.2 billion.

– Cash from operations between $7.6 billion and $7.9 billion.

– Share repurchase of approximately $6 billion.

Overall, CVS targets solid, long-term enterprise growth and expects to generate a significant amount of cash from its operations next fiscal year. With the health care reforms expanding insurance to millions of Americans, the company focuses on creating a more connected health care system through:  1) continued evolution of the health care delivery system through its pharmacy benefit management (PBM) operation; 2) unique specialty pharmacy assets; 3) reinventing its retail pharmacy; and, 4) expanding access of care via its MinuteClinic platform.

Our price estimate of $77 for CVS Caremark is approximately 15% below the current market price.

View our detailed analysis for CVS Caremark

The PBM Business Remains A Key Growth Driver

CVS is the only retail drugstore chain that has its own Services arm (PBM), which allows it to offer scale to its retail clients. The company maintains a national network of over 67,000 retail pharmacies that serve customers covered under the programs administered by Caremark. The company ranked first (among large publicly traded PBMs) in overall satisfaction in the annual pharmacy benefit manager customer satisfaction report released by PBMI in April 2014. The report is a broad survey which includes the opinions of nearly 400 plans sponsors who represent approximately 65 million members.

At its analyst meeting, CVS addressed how health reform has changed the payor landscape with millions of additional Americans gaining insurance coverage. The company claims that the health reform in the U.S. is driving the importance that health plans are playing in the health care marketplace now and into the future. CVS Health sees this as an opportunity to grow its enterprise share by continuing to serve these health plans through its innovative offerings, either as PBM clients or as strategic partners when the plans are not PBM clients.

CVS has a 30% market share in the managed Medicaid market and believes it is well-positioned to gain additional share through Medicaid expansion. The company estimates the managed Medicaid market will grow by 40% through 2016. CVS claims that its health plan client footprint spans 25 states covering approximately 70% of the eligible exchange population. ((CVS Caremark’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 5, 2013))

CVS Is Confident Of Gaining Additional Market Share In Specialty Drugs

Within its pharmacy service management business, specialty drugs are one of CVS Caremark’s top priorities and the company is increasing its focus on developing this business. Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer, among others. At present 60% of specialty revenue in CVS’ PBM segment are dispensed through specialty pharmacy. Specialty revenue grew 34%, 53%, 53% year over year in Q1 2014, Q2 2014 and Q3 2014 respectively. Benefits from new business, the addition of Coram and the introduction of a new specialty drug Sovaldi (a new hepatitis C drug) drove specialty revenue in the first half of 2014.

A new report released by CVS in November 2013 projects that specialty drug spending will more than quadruple by 2020, crossing $400 billion a year. Among CVS’ clients, specialty now represents about 22.5% of total drug spending and the company projects the same to grow to as much as 50% by 2018. [1] At present 60% of specialty revenue in CVS’ PBM segment are dispensed through specialty pharmacy. The company has an approximate 15% market share in specialty drugs.

CVS continues to differentiate its offerings to provide a high level of clinical support to patients, and is confident of increasing its share in the market in the future. It believes that its differentiated approach to specialty pharmaceuticals will drive lower overall costs while improving health and providing value for both payers and patients.

An Expanding MinuteClinic Footprint Will Benefit CVS

MinuteClinics are small walk-in retail health clinics within the CVS Caremark pharmacy stores that utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and dispense vaccinations at much lower prices than a hospital. It is usually staffed with advanced degree nurses known as nurse practitioners who treat routine maladies.

CVS, which accounts for more than one in every five prescriptions filled in the U.S., considers MinuteCinics to be an important factor responsible for its retail and enterprise growth. [2] Currently, the company has over 800 MinuteClinic locations inside CVS/pharmacy stores in 28 states and the District of Columbia. As per a recent report by Merchant Medicine, CVS has a considerable lead with more than double the number of retail clinics compared to its closest competitor Walgreen. (Read: Why CVS Will Benefit From An Expanding MinuteClinic Footprint)

The U.S. is currently facing an acute shortage of primary care physicians. With 30 million additional Americans expected to be included under healthcare coverage (as a result of the Affordable Care Act), the demand is expected to outweigh the supply by about 45,000 doctors by the end of this decade. [2]

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Notes:
  1. CVS Caremark’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2, 2014 []
  2. CVS Caremark’s CEO Presents at UBS Global Healthcare Conference (Transcript), Seeking Alpha, May 20, 2014 [] []