CVS Might Present A Healthy Q3 Performance On The Back Of Its Partnerships And Investments

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CVS Health (NYSE:CVS) is slated to release its Q3 2017 results on November 6th. The company posted a better than expected performance in its Q2 earnings. Shortly after that, CVS announced its plans of introducing vending kiosks in areas that experience high traffic, such as airports, college campuses, bus terminals etc, so that busy customers have the convenience of accessing its products through these outlets. Last month, the Wall Street Journal reported that CVS has proposed to buy Aetna, the third-largest insurer in the United States, for $66 billion. Both the parties have refused to confirm the existence of the deal as of now. If this deal is a success, CVS will enter a new segment in the healthcare business. CVS will have access to Aetna’s ~45 million subscribers who would be encouraged to buy CVS’s products and services. We have an $80 price estimate for CVS Health’s stock, which is around 16% higher than the current market price.

CVS’s Performance So Far This Year

CVS second quarter results indicated that the company might be on its way to recovery from its recent difficulties  that dampened its first quarter results. Its pharmacy benefits management (PBM) was a main driver for its growth. Its pharmacy services revenues grew by 9.5% y-o-y. The segment includes the pharmacy benefits manager business and specialty pharmacy services. However, its  retail/LTC segment revenues continued performing poorly, due to the loss of contracts to Walgreens and lower same store sales. The company’s loss of contracts with the Department of Defense and Prime Therapeutics to its rival Walgreens last year has proven to be a major blow in its performance. The new deals came into effect in December 1, 2016 and January 1, 2017, respectively, and is slowing down CVS’s performance in 2017. The company took several measures to counter the loss of contracts including the expansion of its ongoing partnership with Optum and the offer of bundled service offerings to its customers. These measures are expected to bring savings to the tune of $3 billion by the end of 2021. CVS expects to close around 70 retail stores in 2017, out of which 63 have been closed in the first half of the year. It expects the current year to be one for “rebuilding” as it continues to look for avenues to compensate for the loss of contracts.

CVS Might Be Significantly Benefited If Its Alleged Deal With Aetna Works Out

While the threat of Amazon’s possible entry into the pharmacy business is giving existing players in this segment sleepless nights and also eroding their stock values, CVS’s deal with Aetna might present the pharmacy retailer with major advantages over its peers. This deal might also make up for CVS’s recent loss of some contracts. CVS will be able to tap into Aetna’s 45 million user base and provide them with its offerings which include: pharmacy benefit management – the negotiation of  drug prices on the behalf of insurance companies, MinuteClinics, home infusion services, and long-term care pharmacies.

CVS’s Other Partnerships

CVS’s is currently stressing on partnering with all payers to boost volumes and capture market share. For example, in June, it announced a partnership with Cigna Health Works. In July, it launched a partnership with Optum to provide 90-day retail solutions to the latter’s ASO clients. It has also partnered with Express Scripts’ Diabetes Care Value program to be their retail network option. The company is in talks with many such PBM health plans to expand the reach of its network.

 

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