CVS Health's (NYSE:CVS) management team recently sat down with analysts to discuss the road ahead, but most of us are just too busy to slog through a 174-slide investor presentation. If you're in that boat, relax: Here are five of the most important things CVS wants investors to understand about its plans to remain relevant in a healthcare environment facing tectonic change.
1. Getting ready for anything
Testimony from the American Medical Association might lead to further protest, but the merger between CVS Health and Aetna that the Department of Justice has already approved will probably be just fine. Assuming CVS Health doesn't have to un-complete a $69 billion merger with the health insurance provider, the combined company is poised to profit in more ways than any of its competitors.
Combining a network of services and products is a big part of CVS Health's strategy to remain profitable in a shifting healthcare landscape, and the HealthHUB pilot program in Houston has been a big success. As a result, CVS HealthHUBs will expand from Houston to four different markets by the end of the year. By 2021, CVS Health intends to operate 1,500 HealthHUBs across the country.
Walgreen Boots Alliance is also adding primary care services through a joint venture with Humana, but there aren't any other retail clinics or retail pharmacies that also provide medical benefits and a leading specialty pharmaceutical operation.
2. Specialty pharmaceutical sales are strong
Specialty pharmaceuticals are usually injected or infused rather than swallowed. They also tend to be a lot more expensive than most medicines available in tablet form.
Overall sales of specialty pharmaceuticals are expected to grow by 9% annually across the industry, and CVS Health is doing better than most. In 2019, CVS expects to dispense $43 billion worth of specialty pharmaceuticals, which works out to an 11% annual growth rate over a five-year period.
3. Lowering oncology expenses
A majority of new cancer drugs approved over the past several years target tumors with specific gene mutations. Unfortunately, many patients never have their tumors genotyped thanks to prohibitive out-of-pocket expenses.
Collecting solid tumor samples isn't always an option, but it isn't performed nearly as often as it should be. That means there are heaps of cancer patients receiving standard treatments when new, better drugs designed for their disease are available.
Insurance companies are generally willing to pay for targeted cancer therapies aimed at patients who fall into a genetically defined group. Unfortunately, they're generally resistant when it comes to paying for biopsy procedures and tumor sequencing tests you need before anyone can tell if there's a targeted therapy that fits your disease profile.
CVS Health is integrating a comprehensive oncology solution into Aetna's medical benefits operation. If it works as intended, this will go a long way toward reducing the need for prior authorization forms, along with administrative costs. It should also lead to much better outcomes for patients.
4. Squeezing out synergies
After merging, Aetna and CVS Health had a lot of redundant expenses, and as a result integration synergies are expected to reach between $300 million and $350 million this year. By 2021, CVS Health thinks it can trim around $900 million annually from operating expenses.
Since the company told investors that adjusted earnings per share weren't going to be any higher in 2019 than they were last year, its stock hasn't fared so well. Looking ahead, investors are probably going to be pleased with all the earnings growth that trimming redundant operations can produce.
5. The earnings dip will be temporary
This year, CVS Health expects adjusted earnings to dip from $7.08 per share in 2018 to a range between $6.75 and $6.90 this year. Although an earnings dip isn't what investors wanted to hear from management, it's probably temporary.
In 2020 CVS Health predicts adjusted earnings per share will reach at least $7 per share, and pass the $10 mark in 2022. The company has already reduced its debt load by $5.1 billion since the close of the Aetna transaction and expects to pay down another $2.4 billion before the end of 2019. Lower financing expenses will help the bottom line accelerate in the quarters ahead.
Primed for a comeback
Changing 1,500 stores into one-stop solutions for frequent medical services will differentiate CVS Health from any of its somewhat integrated peers. Unless the pilot program's success was a total fluke, this stock will be making a strong comeback.