EUR 850.00 For Business Accounts Only

Morningstar | CVS Reports a Decent Quarter, Aetna Acquisition Remains on Track to Close

CVS reported a solid quarter, and we are reiterating our $96 fair value estimate for the narrow-moat PBM. The firm reported a robust increase in revenue for all segments as its efforts to become a preferred pharmacy in restricted networks drove retail top line and a good gain in client wins and client member growth bolster its PBM operations. Impressively, CVS was also able to expand its gross margin by 9 basis points--driven largely by strong gross profit performance from the firm’s PBM operations. However, CVS’ retail segment produced a 116-basis-point decrease in gross margins as it was forced to discount its generic pharmaceutical products in order to obtain preferred pharmacy status on several PBM pharmacy networks. Additionally, the firm’s centralized costs as a percentage of revenue increased as management stated it is making investments using funds saved from the recent tax reduction. While these investments have tempered this quarter’s results, we believe they will help lay the ground work for a smoother integration of Aetna assets once the transaction closes. Management stated it expects to close the deal once it has approval from five remaining states. The team feels confident it soon will receive approvals from the remaining states as they are in the final stages of negotiations with key jurisdictions.

As we have previously stated, we believe CVS’ and Aetna’s overall strategy has significant potential to drive material economic profits over the coming decades. With this combination, the new CVS/Aetna healthcare services firm will fundamentally change how healthcare will be provided to individuals. Ultimately, we view the new entity as a healthcare services behemoth with the infrastructure to sell insurance and manage/treat members through every aspect of their healthcare treatment regimens at a lower cost.

From our perspective, this capability will be a key asset in servicing members with chronic and recurring medical issues--especially key for the Medicare insurance cohort. The firms will be able to leverage the significant retail footprint of CVS and its powerful PBM to better control the cost of treating patients. The firm will also be able to leverage Aetna’s large insurance membership book, its solid underwriting and plan design capabilities, and sales and marketing expertise. We believe the combination of these operations will give a new CVS/Aetna entity a key advantage in bringing down the cost of treating traditionally higher-cost individuals.