What’s in store for CVS Health Corp (NYSE:CVS)?

CVS Health Corp (NYSE:CVS) is preparing to report its 4Q2015 scorecard on Feb. 9, 2016. Investors will be looking to see how the company is coping with growing competition in its industry and what it is doing to spur growth in the future. The healthcare sector has been awash with deals in the recent times as actors acquire strategic assets or consolidate to tackle challenges.

Earnings recap

As for the company’s earnings, CVS Health has largely impressed in the recent quarters. In the last quarter, an adjusted EPS of $1.29 matched the consensus expectations and revenue of $38.6 billion beat the consensus estimate of $38.2 billion. Revenue in the quarter rose 10% YoY.

The chart below captures CVS’s revenue trend for the last five quarters.



CVS Health is looking for adjusted EPS to grow in the range of 10% to 14% in 2016.

Headache for CVS Health

Although management of CVS Health Corp (NYSE:CVS) continues to demonstrate crisp execution as can be seen from disciplined financial management and consistent growth, all is not well with the company. The landscape of its industry is rapidly changing and rivals are posing greater threats to CVS Health’s market share. As the leading provider of prescription drugs in the U.S., CVS Health has much to lose when competitors up their game as they are already doing.

Walgreens Boots Alliance Inc (NASDAQ:WBA) is in the process of gobbling up Rite Aid Corporation (NYSE:RAD) and UnitedHealth Group Inc (NYSE:UNH) added Catamaran to its pharmacy division OptumRX to expand its scope and reach. These industry consolidation transactions complicate the picture for CVS Health.

CVS’s potential near-term growth drivers

CVS Health Corp (NYSE:CVS) has multiple programs to help it both defend market share and gain over the near-term despite the threatening shifts in its industry. Here are some of the potential near-term growth catalysts for CVS Health:

Store with a store model: CVS Health recently completed the $1.9 billion transaction to acquire 1,672 pharmacies from Target Corporation (NYSE:TGT). The stores are spread across 47 states. CVS Health intends to rebrand some of the stores acquired through Target as Minute Clinic. Additionally, the agreement with Target allows CVS Health to open 20 additional clinics within Target stores within the next three years. Overall, the acquisition of pharmacies from Target expands CVS Health’s location footprint and paves the way for revenue and profit improvement.

Because Target has been operating its pharmacies at near breakeven, you can bet that CVS Health will leverage its crisp execution style to quickly make the pharmacies more profitable, thus boosting its overall bottom-line. If the store within a store format proves successful, you can also expect CVS Health to ink more such deals to drive more bottom-line gains. However, it is worth noting that the agreement with Target bars CVS Health from entering into similar arranges with certain retailers, which may limit CVS Health’s store within a store business format outside Target’s shadow.

The long-term care channel: CVS Health is expanding into the long-term care market through Omnicare. The strategy not only promises to broaden CVS Health’s dispensing channels, but alsoto  help close gaps in healthcare, especially by improving business among seniors.

Additionally, CVS Health’s long-term care pharmacy program creates an opportunity for the company to boost its enterprise-themed business, thus creating avenues for future gains.

CVS’s potential long-term growth catalysts

Red Oak joint venture

CVS Health Corp (NYSE:CVS) entered a 10-year joint venture deal with Cardinal Health Inc (NYSE:CAH), leading to the creation of an entity known as Red Oak to negotiate for the best generic drug prices with manufacturers of drugs. Red Oak is the largest entity of its kind in the U.S.

CVS Health plans to transfer generic drug procurement for its Target pharmacies and Omnicare division to Red Oak before the end of this year. It is worth noting that Red Oak is already an intriguing success. Because of its early success, Cardinal Health paid CVS Health a bonus of $20 million in 2015 and the company is in for at least $60 million this year. Those bonuses are on top of the nearly $1 billion total fixed payments that Cardinal will make to CVS Health.

Both CVS Health and Cardinal stand to benefit immensely from the Red Oak arrangement over the long term – 10 years.

Maintenance Choice

This is one of CVS Health’s innovative efforts to both drive growth over the long-term and boost prescription adherence. Through Maintenance Choice, CVS Health customers can choose between mail and store options to receive their 90-day medication supplies for chronic conditions. Maintenance Choice plan members also enjoy a number of benefits regardless of the fulfillment option they choose.

According to CVS Health, patients suffering from chronic conditions such as coronary artery and diabetes have typically demonstrated poor adherence to medication regimen. It is estimated that non-adherence costs the U.S. healthcare system at least $300 billion every year.

Therefore, CVS Health’s Maintenance Choice program fills a gap in the provision of healthcare services, especially in dealing with poor prescription medication adherence. The rapid adoption of the plan is certainly a testament to its benefit. Maintenance Choice exited 2015 with more than 23 million members, up from 2.9 million. The plan’s membership is poised to hit 44 million before long, thus expanding dispensing channels for CVS.

Specialty Connect

Specialty Connect is another innovative program by CVS Health Corp (NYSE:CVS). The program is modeled along the line of Maintenance Choice, except that it is exclusive to specialty medications. Through Specialty Connect, people can mail or bring their scripts to CVS Health pharmacies for fulfillment of their prescriptions. In addition to fulfilling the scripts, CVS also renders other services to Specialty Connect members, some of which border on boosting adherence to medication regimen. As such, Specialty Connect also provides an avenue for CVS to drive long-term growth.

Withdrawal from tobacco business

CVS Health felt it was a contradiction to continue selling tobacco products and advocating for good health in the same breath. As such, the company exited tobacco business and warned that the move would see it loss $2 billion in revenue. However, the company is quickly finding ways to make up for the revenue loss. CVS Health is  driving incremental growth through health-conscious payers, plans and consumers. The move has also given CVS Health an advantage on rivals such as Walgreens in selling to health-conscious customers and that should drive long-term benefits for the company.

Bottom line

CVS Health Corp (NYSE:CVS) is trying to do things in unconventional way, it should be able to not only sidestep pressures in its industry, but also tap more growth over the long-term.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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