Why is the stock down?
There has been multiple events pushing the stock down:
· Omnicare underperformance that led to an additional write-down in 4Q18
· Loss of the Centene and WellCare business as those two clients merge and will bring the PBM in-house
Outside of their control:
· Democrat’s push for Medicare-for-all would impact health insurers (and recent Aetna acquisition)
· Removal of the rebates practice in the government side of the PBM business (CVS is #3 in this space)
· Drug Pricing Transparency Act: this bill would force PBM to pass all rebates to the point of sale and no longer be kept by PBM and/or health insurers
· Push to repeal Obamacare back in the news
· Walgreens had bad earnings and cut their 2019 forecast, pushing the sector down
Why remain invested in CVS?
1/ We find CVS’s long-term strategy of vertical integration compelling:
· This can truly help CVS differentiate themselves from competitors by offering a powerful value proposition, leveraging its network and developing predictive data analysis that will help them lower costs of care
· A similar strategy was successfully implemented by UNH who saw nice margins growth after the integration of Catamaran (PBM)
2/ Retail store footprint combined with MinuteClinic and their new HealthHub concept could become a great growth engine for CVS:
· The retail stores ($19.7B in sales, >10% of total sales) have suffered from lower foot traffic following the removal of tobacco sales
· Offering customers another reason to visit the stores/pharmacy thanks to their new Health & wellness concept (to become 20% of the square footage of the store) could revive traffic
3/ Valuation: we see a disconnect between today’s stock price and the value of its businesses:
· Our sum-of-the-parts and cash flow analysis both show an attractive risk/reward profile
We are currently reviewing our position size for this stock.
[tag CVS]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109