Morningstar | CVS Is Now One of the Most Powerful Players Within the U.S. Healthcare Market
CVS Health has sought a strategy of expanding beyond its legacy retail pharmacy operations and become a healthcare services company. The firm has positioned itself as a major player within the U.S. healthcare ecosystem by building itself into a top-tier pharmacy benefit manager and one of the largest U.S. pharmacy retailers. The firm recently announced it will acquire Aetna; in a move to vertically expand its operations into health insurance. The firm recently recvied approval from all regulatroy bodies and the deal is expected to close fairly shortly. This deal transforms CVS into one of the most powerful players within the healthcare space.We view this strategic move as a positive from an operational standpoint and believe the new CVS/Aetna will be a healthcare services behemoth with the infrastructure to sell insurance and manage members through every aspect of their treatment regimens. However, we are concerned CVS may have overpayed for Aetna by a material amount given it will pay almost double what we believe Aetna is worth on a standalone basis. This means CVS and Aetna will be under significant pressure to execute an integration that has minimal issues. Given the complex and large nature of both entities, we believe there is some risk shareholder value may be impaired. The new CVS/Aetna will be structured as a brand-new business model and the uncertainty surrounding this prospect prevents us from rating the new firm with a wide economic moat. However, we do believe there is a major opportunity for the combined entity to reduce the costs of treating insurance members, and it is more likely than not the firm will eventually out earn its cost of capital over an extended period. Accordingly, we believe the new CVS/Aetna will at least possess a narrow economic moat. CVS is the owner of the largest network of retail pharmacies in the U.S., and this asset will play a key role for the new entity. The new firm will eventually turn its retail locations into "Healthcare-Hubs" where members can obtain a plethora of healthcare services and products. These hubs should allow the new firm to drive the healthcare costs for its entire membership book to low.CVS Health is a health company. The company's segments are: Pharmacy Services, which provides a range of pharmacy benefit management solutions, including plan design offerings and administration, formulary management, and retail pharmacy network management services; Retail/Long-Term Care (LTC), which sells prescription drugs and general merchandise, including over-the-counter drugs, provides health care services through its MinuteClinic? walk-in medical clinics and conducts LTC pharmacy operations; and Health Care Benefits, which provides a range of voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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