• My view is that it won’t have an impact near term to CVS, but longer term it could be disruptive. I think it will give them a bigger negotiating power over health insurance costs.
• This is not the first time large companies try to form an alliance to resolve this high healthcare cost issue: the Health Transformation Alliance, a group of 40+ large employers, covering 6 million lives, was formed to reduce costs (http://www.htahealth.com/). The group was looking to partner with CVS & Optum to reduce costs.
• Just a reminder that CVS has a higher share of the Medicare Part D scripts, representing 30% of CVS PBM scripts (according to Morgan Stanley), which is more profitable and not targeted by the AMZN/JPM/Berkshire JV. CVS’s Silverscript subsidiary is the #1 PDP insurance company by enrollment with 5.5 million lives as of January 1, 2017, accounting for 22% of total Part D lives.
Morgan Stanley wrote in a report last year: “Medicare population is two to three times more profitable (in terms of absolute operating profit contribution per annum) than commercial life because of higher script utilization and additional profits earned from net underwriting gains. On a per script basis a Rx is ~ inline to 10% lower than commercial book, by our estimate.” This business is not targeted by AMZN. It could however become a target of the government, although it looks like healthcare is less a focus at the moment.
So overall I don’t see the CVS thesis as broken.
Below is a chart that shows the major plans/PBM/drug retailers in the US (the only change there is Anthem now being with CVS and no longer with Express Scripts). CVS also deals with lots of small regional plans not shown here.
This is definitely an interesting time in the healthcare space!
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Amazon Health Foray More Bark Than Bite for Now: Street Wrap (1)
2018-01-30 18:22:31.316 GMT
By Bailey Lipschultz and Tatiana Darie
(Bloomberg) — Health-care stocks from Express Scripts
Holding Co. to CVS Health Corp. were roiled by news that
Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase &
Co. were entering the space to aid their workers and cut costs.
The “Amazon boogie-man” hit pharmacy benefit managers and
insurers the hardest as the news spoiled investor sentiment.
However, the group’s decision is “more bark than bite at this
point,” Cantor Fitzgerald analyst Steven Halper wrote in a note.
Piper Jaffray health services analyst, Sarah James
* Views the partnership as “noise,” adding that today’s selloff
is a buying opportunity for “high quality leaders” such as UNH
and ANTM
* “Many have tried, but few have succeeded,” she wrote. “We do
not expect this JV to be a meaningful disruptor to the industry,
despite the stock reaction indicating that it is.”
* Says insurance is a complex industry with high barriers to
entry and nuanced expertise required, noting that Berkshire has
a history as a long-time Aetna supporter
* Says health-care IT already offers some solutions for bending
the U.S. cost curve, adding that it would be difficult for a
purely technology-based company to compete against the size and
cost-savings capabilities from the likes of UNH
Cantor Fitzgerald health services analyst, Steven Halper
* “Too early to cede victory,” but does not want to discount the
clout the companies bring to the table
* Sees group’s effort as “more bark than bite at this point”
* Partnership fully supports thesis that employers, providers
and health plans will have to embrace consumer engagement
technology
RBC Capital Markets health services analyst, George Hill
* “If this was the Amazon announcement drug supply chain
investors have been fearing since early 2017, consider us
relieved”
* Notes the group is not the first to “work together to rein in
healthcare costs”
* Move plays well, validates CVS Health-Aetna vertical
integration investment thesis
BMO Capital Markets managed care analyst, Matt Borsch
* Announcement is “tailor-made” to spoil strong investor
sentiment toward managed care in the near-term
* Inferred targeting of managed care likely driven by
description of the company as “free from profit-making
incentives and constraints” since managed care industry is more
than 50% for-profit
* Sees investor reaction depending on further detail and shaping
of market opinion surrounding the new initiative
Leerink health IT and distribution analyst, David Larsen
* News is consistent with expectations Amazon’s health-care
efforts are “heating up”
* Project will take years to build, though a lack of clarity and
uncertainty will create fear and pressure CVS, Walgreens Boots
Alliance, and other supply chain stocks today
* Comments from Warren Buffett, Jeff Bezos and Jamie Dimon all
highlight the complex nature of the industry
Oppenheimer health IT and distribution analyst, Mohan Naidu
* “This is the beginning of a new type of offering for the
consortium of employers to bypass well-established healthcare
entities and adopt a disruptive offering,” he said, projecting
that this will likely accelerate M&A within health care
* Says PBMs are likely to be significantly affected, followed by
dispensaries and supply chain names
* Says partnership unlikely to have any influence in 2018 or
even 2019
Wells Fargo specialty pharmaceuticals analyst, David Maris
* The fact that three large, well-capitalized companies will
plan to attack rising health-care costs and transparency “is
just another sign that longer-term, generics and branded
pharmaceutical margins are in flux”
* Generic margins could stay under pressure in a more
transparent environment, but branded drugs might even see a
benefit if rebating is reduced or eliminated, with savings going
to both the patient and manufacturer
Loop Capital Markets analyst covering Amazon, Anthony Chukumba
* Not surprised by today’s announcement, as health-care is a
large and growing industry with relatively high profit margins:
“just the type of sector Amazon typically targets”
* Reminds investors of one of Bezos’s favorite sayings: “Your
margin is my opportunity.”
* Finds it noteworthy neither of Amazon’s partners are currently
in the health-care industry but given their resources and
expertise, he’s optimistic about the partnership’s chances of
long-term success
Cowen health care team, led by Charles Rhyee
* Distributors are least affected, PBMs and drug retailers are
possibly at some risk, while health care technology is “probably
a mixed bag”
* Sell-off in the managed care sector is an over-reaction given
historical challenges
* New entity doesn’t appear to break any new ground, should work
within the existing system vs creating one from scratch
To contact the reporters on this story:
Bailey Lipschultz in New York at blipschultz@bloomberg.net;
Tatiana Darie in New York at tdarie1@bloomberg.net
To contact the editors responsible for this story:
Arie Shapira at ashapira3@bloomberg.net
Jeremy R. Cooke, Christiana Sciaudone