OMG: This Popular Drugstore's Stock Just Crashed 5%. Is Your Money in Danger?
"Opportunities Come Infrequently. When It Rains Gold, Put Out The Bucket, Not The Thimble" - Warren Buffett
CVS Health Corporation is the largest pharmacy health care provider in the United States.
The company operates one of the nation’s largest retail pharmacy chains with nearly 10,000 locations along with CVS Caremark, a leading pharmacy benefits manager servicing over 103 million plan members through employer-sponsored, government-subsidized and other health plans.
CVS fills over 1.5 billion prescriptions per year as a dominant integrated pharmacy services player focused on overall consumer health.
Ticker: CVS
Price: $73
P/E Ratio: 11.22
EV/EBITDA: 7.5
MKT Cap: 94.434B
10 Year Median ROIC: 6.7%
Why is CVS Down?
According to a recent article from the Wall Street Journal, shares of CVS and other health insurers such as Humana and Centene fell after UnitedHealth Group reported its earnings for the fourth quarter of 2023.
The report showed that UnitedHealth’s medical costs were higher than expected, which led to a 3.1% drop in UnitedHealth’s stock price.
This news caused investors to worry that patients, particularly in the Medicare Advantage business, are using more services than expected and that pattern could linger into 2024.
As a result, shares of rivals Humana, CVS and Centene were also down.
How CVS Makes Money
CVS primarily makes money in two key ways:
Retail Pharmacy Operations
CVS earns revenue by filling prescriptions and selling over-the-counter medications, health/beauty products, food/beverages, and more at its nearly 10,000 pharmacy locations across the US.
They negotiate discounted drug prices with suppliers and benefit from co-pays and insurance reimbursements when filling patient prescriptions. Higher prescription volume means more revenue.
Pharmacy Benefits Management (Caremark)
Caremark provides prescription benefit management services for over 103 million plan members in the US.
They negotiate lower drug costs and preferred rates through retailers for health plans and employers. Caremark earns revenue through percentage and fee-based negotiations for these services.
Essentially, CVS leverages vertical integration between retail pharmacies and pharmacy benefits manager to drive higher volumes at favorable margins. Owning the PBM helps CVS pharmacies fill more scripts. And owning pharmacies helps Caremark drive prescription volume.
This mutually beneficial “closed system” allows CVS to capture more consumer healthcare spending across retail, distribution channels and insurance benefits.
How CVS Can Increase Revenue
Here are a few ways CVS Health could potentially increase their revenue:
Grow Retail Pharmacy Business
Open additional retail pharmacy locations in uncovered regions or markets to increase overall prescription volume and front store sales
Drive more prescriptions to existing stores through digital marketing, partnerships with local providers, and prescription refill/loyalty programs
Expand Health Services Offerings
Continue adding MinuteClinic locations and in-store health clinics to offer more vaccines, diabetes care, screenings, basic procedures to drive foot traffic
Acquire or partner with primary care groups or outpatient service providers to create attractive clinics that feed patients to CVS pharmacies
Enhance Digital Healthcare Capabilities
Invest in telehealth technologies to provide consumers with enhanced medication reviews and refills, remote diagnoses, and e-prescription solutions with doctors
Partner with companies on predictive analytics to leverage combined datasets and better personalize recommended health services and products to CVS patients
Grow Pharmacy Benefits Management (Caremark) Membership
Underbid any PBM competitors to aggressively gain net-new large health plan sponsors and add members
Acquire smaller PBMs to consolidate market share
Partner with insurance companies to create coveted narrow-network Medicare Part D plans relying primarily on CVS pharmacies
The key focus areas center on deepening CVS' integrated physical and digital health offerings to own more of the consumer healthcare journey while also expanding their PBM membership base. Executing on these areas effectively could allow CVS to materially build up their total enterprise revenue.
What Sets CVS Apart?
CVS has a few key advantages that set it apart from pharmacy and health services peers, creating defendable moats around the business:
Massive Retail Pharmacy Scale
With around 9,900 retail pharmacies nationally, CVS has the largest physical footprint by far, enabling a huge amount of direct access to patients and consistent foot traffic that rivals can't easily replicate.
PBM Market Share Leadership
CVS Caremark is a top 3 US pharmacy benefits manager controlling over 30% of the PBM market. This level of position and massive membership (103+ million) gives CVS unique negotiating leverage and integrated efficiencies.
Vertical Integration
CVS is the most vertically integrated pharmacy/PBM/health services company with closed ecosystem alignment from insurance beneficiaries to prescription fulfillment. This maximizes margins across the Rx supply and reimbursement chain.
Store Brands / Relationships
Signature CVS store brands like MinuteClinic, CVS HealthHUB, Navarro Discount Pharmacy and Rx offerings create stickiness, community ties and differentiation vs. standalone pharmacies.
In summary, CVS essentially has scale, integration and brand equity moats driven by its multi-channel health services approach. Competitors struggle to recreate the full retail footprint, PBM membership base and closed ecosystem value chain control that CVS uniquely commands in one company. These durable competitive strengths help CVS stand apart and reinforce its leadership position over the long run.
Conclusion
In closing, while unexpected stock drops like CVS's 5% decline can be unnerving, this leading integrated pharmacy services company has formidable competitive advantages supporting its business.
CVS boasts massive retail scale, top PBM market share, a vertically integrated model driving synergies, and strong community pharmacy brands cultivating loyalty across channels.
With health care spending only expanding over time and CVS situated as a gatekeeper across insurance coverage, prescription fulfillment and front-line patient care, the company seems poised for sustainable free cash flow generation to reward long-term investors.
Of course, challenges always exist around regulatory changes and margin pressures. However, CVS has a sturdy moat and array of growth levers, whether organically through new store formats or digitally via telehealth.
For those willing to stomach some volatility, today's dip could offer a promising entry point for this healthcare juggernaut.
Wrapping up
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