The odds look good that 2016 will be a great year for CVS Health (NYSE:CVS) investors, as several of the big bets that it placed in 2015 should start to bear fruit. The continued rollout of its in-store MinuteClinics and the ongoing success of its pharmacy benefit manager business should also work to keep the good times rolling.
Despite my own bullishness, it's always wise to approach a company's stock with a healthy dose of caution, as no business is perfect. Below I've highlighted three developments that could potentially lead to trouble down the road, so investors need to watch them closely.
1. Obamacare blues
On of the key growth drivers that is working in CVS Health's favor is the continued rollout of the Affordable Care Act, which is more commonly known as Obamacare. After all, more patients with health insurance coverage should lead to an increase in the number of prescriptions getting filled, which would benefit pharmacies.
However, there are reasons to believe that the rollout of Obamacare isn't quite going to plan. In November UnitedHealth Group (NYSE:UNH), the nation's largest health insurer, warned that its individual exchange-compliant products that were enacted as part of Obamacare were not performing as well as the company had expected. At the time, UnitedHealth Group lowered its fourth quarter profit guidance by $425 million and let investors know that it was considering discontinuing offering individual-exchange products to consumers. The news got even worse last week when UnitedHealth Group's management team said that it expects to lose another $500 million on Obamacare plans in 2016.
That could be a cause of concern. If UnitedHealth Group -- the nation's largest insurer -- can't make money on the Obamacare exchanges, then who can? If the company stops offering Obamacare plans in 2017 then it's likely that other insurers will eventually follow suit. That could put a damper on CVS Health's longer term growth prospects.
2. An acquisition could spell trouble
Late last year CVS Health's chief rival Walgreens Boots Alliance (NASDAQ:WBA) announced it was buying out Rite Aid for $17.2 billion. At the time of the announcement Walgreens Boots Alliance had a global footprint of 13,200 stores, with the majority of them residing in the states. Rite Aid operated another 4,561 locations. Adding them them together would make CVS Health's comparative footprint of 9,500 stores look small.
The deal still has to clear a few more hurdles before it is made official, but if it does go through then it's uncertain what kind of impact this will have on CVS Health's business. Will this acquisition be a net positive for CVS Health, as it turns the retail pharmacy industry into a virtual duopoly? Or will Walgreens use its expanded size to get more aggressive in competing against CVS Health?
3. Playing favorites could backfire
Late last year CVS Health put itself in a potentially awkward situation after it announced that it signed an exclusive deal with Amgen (NASDAQ:AMGN) that put Repatha -- Amgen's new cholesterol-busting PCSK9 inhibitor -- on its formulary. At the time, CVS Health claimed that Repatha and its direct competitor Praluent were "therapeutically equivalent" to one another, so it made the decision to only offer Repatha to its members. This likely boiled down to pricing, implying that Amgen was willing to give CVS a huge discount in order to grab exclusivity.
While time could show that this was a good decision, it also exposes CVS Health to a potential risk. Repatha and Praluent could prove to be equivalent to each other. However, long-term safety data on these drugs has yet to be released, so there is no way to know for sure yet. Those studies are going on right now, but the data won't be available until the latter half of 2016.
So what would happen to CVS Health's reputation of putting patients first if these studies show that Praluent is clinically superior to Repatha? It's impossible to know for sure, but it's not out of the question to think that CVS Health's business might be affected if the data shows that it backed the wrong horse just to save a few bucks up front. This move is even more of a head-scratcher when you consider that CVS Health famously gave up billions of dollars in revenue from tobacco sales a few years ago in order to help build its brand.
Only time will tell if they made the right decision, but it still looks like they are gambling, and it could come back to bite them in the end.