Factors Behind the Upward Revision of Our Price Estimate For CVS Health
We recently revised our price estimate for CVS Health (NYSE:CVS) from $82 to $97. After the upward revision by almost 20%, our new price estimate stands at a discount of more than 10% to the current market price. Factors that led to this increase include a change in our forecast of the company’s depreciation and higher growth expectations for revenue that CVS Health generates from each of the pharmacy network claims and mail order claims processed.
The composition of drugs dispensed by the company is a major determinant of CVS’ revenue per claim. The share of generics, which are usually at least 80% cheaper than their branded versions, increased from 74% in 2011 to more than 82% in 2014. However, generic prices have shot up during this period, and 2014 also saw the launch of several specialty therapies increasing the revenue generated per each claim processed. According to an IMS Health report [1], 73% of the growth in overall medicine spending between 2010 and 2014 was due to specialty medicines, which increased $54 billion in five years. While we expect generic inflation to continue, a pick-up in usage and costs of specialty therapies (more than what we expected earlier) has led us to raise our forecasts. Below, in this article, we will take a closer look at the above factors.
View our detailed analysis for CVS Health
- Change in Depreciation Forecasts
In our model for CVS Health, earlier, our forecast of depreciation expense was based on capital expenditures in the preceding years. For example, our forecast of depreciation expense for the calendar year 2015 is derived from the amount of capital expenditure that the company incurred in the previous four years. The updated forecasts of the depreciation expense over Trefis forecast period also include depreciation for operating leases that we expect the company to incur. While this contributed to the overall upward revision, a rather important change that led to the revision is our view on the specialty drugs space.
- Higher Usage of Specialty Therapies
Specialty drugs treat complex diseases such as multiple sclerosis, hepatitis C and cancer, among others. Even though these drugs are characterized by high cost, they are seeing a huge demand because of their high efficacy in treating complex conditions. With more people coming under insurance coverage via the Affordable Care Act (projected to be more than 30 million), a larger share of patients are able to afford these high-priced drugs, resulting in even higher demand for specialty drugs. By 2016, specialty medications are expected to account for approximately 40% of all pharmacy spending. [2]
This has led us to revisit our forecasts for CVS’ revenue per each claim, be it through the mail order channel or via the pharmacy network. Earlier, we expected revenue per claim via both channels to stay flat to slightly negative owing to generic inflation. According to our latest model, however, revenue per mail order pharmacy claim processed is expected to increase by about 30% and that for each pharmacy network claim processed is expected to increase by a similar amount (25%) over the Trefis forecast period. A key difference between these channels is that the share of specialty drugs tends to be higher in those delivered by mail orders, and hence the higher expected growth in revenue per claim in that channel.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Other Sources: Specialty Pharmacy Times
Notes: