On August 23, CVS Health (CVS -0.66%) made waves when it announced that it would be initiating a new subsidiary called Cordavis that will be devoted to commercializing biosimilar medications. Now, investors can look forward to the company posting a faster pace of recurring revenue growth as it brings copies of best-selling drugs to market over the coming years.
But does the launch of Cordavis make the stock a buy? Let's dive in and figure out the financial impacts to answer that question.
NYSE: CVS
Key Data Points
Aiming for a Humira biosimilar right out of the gate
Biosimilar medicines are appealing to produce for a couple of reasons. First, they don't incur many research and development (R&D) expenses to commercialize in comparison to discovering and testing a drug from scratch. All that biosimilar manufacturers need to do is perform a couple of clinical trials to demonstrate that their products function just as well as the branded versions they're trying to copy. Second, biosimilars have a proven market as sales of the branded version make for a good estimation of demand. That minimizes the risk of a commercial flop.
So when CVS said that the first medicine Cordavis would produce is a biosimilar of Humira, AbbVie's (ABBV +0.83%) biologic for rheumatoid arthritis as well as a plethora of other conditions, it was pretty clear that it wouldn't have any trouble generating a boatload of fresh revenue down the line. In 2022 alone, sales of the drug totaled more than $21 billion, and it's definitively one of the biggest-grossing medicines of all time. Now that Humira's exclusivity protections have lapsed, CVS could thus be part of the ongoing gold rush to commercialize a copy and grab a share of its gargantuan market.
By Q1 of 2024, it plans to have its candidate finalized and out the door. It'll be priced at about 20% of brand-name Humira, so it's safe to say that it will be able to find buyers. But it won't be the only competitor in the market as there's no drug that's a higher priority for generic manufacturers to make than Humira at the moment.
NYSE: ABBV
Key Data Points
The synergies could eventually be huge
CVS doesn't plan to do any R&D itself for any of its Cordavis projects, nor has it disclosed what it'll be doing after launching its Humira biosimilar. Nonetheless, in the long term, the move into biosimilars could be a significant driver of profits.
Given that the company is a major insurer and increasingly also a distributor of primary healthcare, it's well-positioned to make the most out of its biosimilar segment. It will likely be able to take advantage of economies of scale in manufacturing as well as distribution. Both of those could contribute to its developing a very difficult-to-emulate competitive advantage in the biosimilars market. But even with the launch of its copy of Humira, investors should be realistic about what Cordavis will accomplish for CVS stock in the near-term.
CVS had a top line of more than $322 billion in 2022. If we assume it can capture the entire market for Humira at an 80% lower price point, it would bring in an additional $4.2 billion per year. That would mean increasing its revenue by about 1%. And there's basically zero chance that it'll capture the entire market, especially not right out of the gate.
Therefore, while the plans to compete in the generics/biosimilars market is indeed a point in favor of the bull thesis for this stock, it isn't a reason to buy it in and of itself. It'll take years for Cordavis to spin up enough different biosimilars to be a significant driver of growth. If you were already considering a purchase of CVS, think of the new development as a nudge.
But if you're looking for an actual growth stock rather than a behemoth that's slowly turning to chart a slightly faster course, you'll be disappointed if you buy it today.
