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CVS Health Grows on Specialty Pharmacy amid Retail Woes


On Aug 9, we issued an updated research report on Rhode Island-based pharmacy retail giant, CVS Health Corp. CVS, which provides integrated offerings across the entire spectrum of pharmacy care.

Post a better-than-expected performance in the second quarter, CVS Health was observed trading significantly ahead of the broader industry. Per the last three months’ share price movement, the stock has lost 1.9% over this period, narrower than the broader industry’s 4.9% loss.

On a positive note, strong Pharmacy Services numbers benefited from the upside in Specialty Pharmacy. Per a recent data, three million people in the U.S. are currently in need of specialty treatment which has high potential costs. With management emphasizing that CVS Health’s specialty business remains a top priority for its customers, we believe it is well-positioned to tap this opportunity based on the broad, differentiated offerings, including the likes of Specialty Connect.

The company’s strong PBM selling season also looks encouraging. Regarding 2018 selling season, despite the magnitude of bidding opportunities being flat to down year over year, the company had a successful quarter.

While gross new business was $5.4 billion, net new business also reached an impressive $1.8 billion. These new business numbers include loss of the FEP specialty contract but lack any impact from individual Med D PDP (prescription drug plan). The company has already completed about 70% of client renewals for 2018.

Despite a soft bottom line, the company narrowed its 2017 earnings outlook, indicating chances of recovery ahead. We believe, both the Omnicare and Target Pharmacy buyouts, which have already started to benefit CVS Health on multiple prospects, should drive the enterprise value significantly in the coming days.

However, poor year-over-year Retail/LTC (long-term care)numbers along with margin debacle dragged the bottom line, last quarter. Notably, the highly competitive retail pharmacy market too seems to pose a threat. Also, the sluggish economic condition in the U.S. is a concern.

The stock currently carries a Zacks Rank #3 (Hold).

Key Picks

A few better-ranked medical stocks are Edwards Lifesciences Corporation EW, Myriad Genetics, Inc. MYGN and Align Technology, Inc. ALGN. Notably, Edwards Lifesciences and Align Technology sport a Zacks Rank #1 (Strong Buy), while Myriad Genetics carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 27.9%. The stock has added roughly 26.7% over the last three months.

Edwards Lifesciences has a long-term expected earnings growth rate of 15.2%. The stock has gained around 5.5% over the last three months.

Myriad Genetics has a long-term expected earnings growth rate of 13.8%. The stock has added roughly 26.9% over the last three months.

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