CVS Health (CVS) Under Fire: How Will the Stock React to Pharmacist Backlash?

Drugstore chain and pharmacy benefits manager CVS Health Corporation (CVS), with a market cap of $91.62 billion, has managed to navigate post-pandemic challenges with remarkable adeptness and resilience.

However, the specter of questionable working conditions looms large over pharmacists nationwide. Lengthy working hours, staff shortages, and an escalating workload often leave scant room for proper patient care, potentially leading to severe repercussions for pharmacists and their patients.

Waves of protest against what they perceive as substandard working conditions and unsafe patient care surged among CVS pharmacists in Missouri last Wednesday. About 22 CVS locations in Kansas City and pharmacies inside Target (TGT) stores were temporarily shut down late last week when pharmacists, supported by staff and additional healthcare personnel, raised their voices against overworking, arguing it compromised patient safety.

At the core of the matter lies understaffed pharmacies, which impede pharmacists’ ability to give patients adequate attention. This threatens the standards of care and advances the risk of medication errors. The non-unionized pharmacists called for limits on administered vaccine quantities, improved scheduling, and additional modifications.

In the face of scarce support and resources, many pharmacists cannot deliver optimal patient care. The protest led by CVS pharmacists aims to highlight these pressing issues and chart the course for a more sustainable, patient-oriented healthcare structure that prioritizes the well-being of pharmacists and their patients.

The Impact So Far

CVS shares tumbled 2.2% on Wednesday following the announcement of a second walkout by CVS pharmacists in Kansas City, MO, within a week.

Despite the corporation's apology for the delay in addressing their grievances and assurances of procedural improvements, recurring strike actions could detrimentally affect the quality of service delivery and impede its capacity to provide critical healthcare to consumers amid escalating COVID-19 cases and increased testing needs nationally.

The ongoing walkout might potentially cause turbulence in the COVID-19 booster shot rollout. Impact assessment remains uncertain as CVS pharmacists have not established the protest's duration nor its corollary effects on Target pharmacy booths and standalone drugstores.

Amid severe staffing constraints, pharmacists struggle to manage the soaring demand for COVID-19 and seasonal flu vaccinations and regular prescription needs. Consequently, customers should anticipate possible delays.

The series of protests have culminated in diminished customer satisfaction and erosion of consumer confidence, compelling some to transition to alternate pharmacy providers due to the ongoing challenges at CVS.

How CVS Might Be Affected

In the ongoing scenario, if the walkout continues, it risks not only eroding customer trust and precipitating a downward slide in sales, but it could also taint the company's reputation and brand value. This situation might indicate ineffective management, strained labor relations, and a compromised corporate culture.

Trapped in this crisis, CVS' ability to surpass rivals and its market dominance within the healthcare sector could face significant obstacles. The walkout could inflate the financial burden on CVS due to increased costs and liabilities related to potential legal ramifications arising from contract breaches or substandard practices.

Furthermore, the company’s operational efficiency and productivity are at stake as disruptions in supply chains and work processes threaten its smooth operations. These factors could collectively destabilize the company's financial stability and outlook. If unresolved over extended periods, the walkout could lead to substantial wealth erosion for shareholders.

However, amid this predicament, a few silver linings should be considered. Here are additional elements that could potentially shape CVS' trajectory in the forthcoming months:

Recent Developments

CVS, holding its position as America's largest drugstore chain, has pledged allegiance to the rising trend of biosimilars with the inception of its wholly-owned subsidiary, Cordavis. This new entity aims to liaise directly with manufacturers to commercialize or co-produce biosimilar products, reflecting CVS' strategy to mitigate drug costs for consumers by developing biosimilar medications and conducting direct negotiations with pharmaceutical companies.

This development signals promise for consumers and investors, as CVS harbors both an industry opportunity and the extensive scale required to compete effectively with eminent drugmakers.

The repercussions of the pandemic have catalyzed a paradigm shift in the U.S. drugstore industry, mainly characterized by consolidation trends. As we progress beyond this global crisis, traditional retail has faced challenges regaining traction, particularly in comparison with more robust sectors. Amid this scenario, drugstores have emerged as epicenters for evolutionary shifts and potential mergers.

CVS has recently stepped up its strategic initiatives by actively seeking partnerships, pursuing growth, and implementing a consolidation plan. As a result of a policy adjustment initiated in 2021, hundreds of CVS branches are set for closure as part of the company's cost-cutting measures to pre-empt potential losses.

In late 2021, the organization confirmed that it was assessing changes in population dynamics, consumer purchasing trends, and projected health requirements to assure the optimal placement of its stores for both customers and corporate viability.

CVS plans to lessen store saturation in certain areas as part of these efforts, leading to the shuttering of roughly 300 stores annually over the next three years. This strategic decision came as CVS aimed to allocate resources better and adjust to changing customer behaviors. The company anticipates that this course of action will close nearly 900 locations by the end of 2024.

Robust Financials

CVS’ total revenues increased 10.3% year-over-year to $88.92 billion in the fiscal second quarter that ended June 30, 2023, with product revenue rising 6.6% year-over-year to $60.54 billion. The company reported an adjusted operating income of $4.48 billion. Moreover, its adjusted EPS amounted to $2.21.

Attractive Valuation

CVS’ forward EV/EBITDA of 7.92x is 36.8% lower than the 12.54x industry average. Its forward EV/EBIT and Price/Sales multiple of 8.99 and 0.26 are 44.1% and 93.3% lower than the industry averages of 16.07 and 3.86, respectively.

Robust Growth

CVS’ revenue grew at CAGRs of 8.7% and 12.6% over the past three and five years, respectively. In addition, its total assets grew at 2% and 13.4% CAGRs over the past three and five years, respectively.

High Profitability

CVS’ trailing-12-month EBITDA and EBIT margin of 5.42% and 4.17% are 3.4% and 896.2% higher than the 5.25% and 0.42% industry averages. Moreover, its trailing-12-month levered FCF margin of 5.33% is significantly higher than the industry average of 0.26%.

Growing Institutional Ownership

CVS’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their CVS stock holdings.

Institutions hold roughly 77.9% of CVS shares. Of the 2,413 institutional holders, 1,090 have increased their positions in the stock. Moreover, 118 institutions have taken new positions (9,005,031 shares).

Price Performance

Even though CVS’ shares have plunged 28.2% over the past year, over the past three months, the stock gained 1.6%. Moreover, shares of CVS have gained 3.7% over the past month.

Wall Street analysts expect the stock to reach $91.53 in the next 12 months, indicating a potential upside of 31.2%. The price target ranges from a low of $80 to a high of $110.

Favorable Analyst Estimates

For the fiscal third quarter ending September 2023, analysts expect CVS’ revenue to increase 9% year-over-year to $88.43 billion, while its EPS is expected to come at $2.13. Moreover, for the fiscal year ending December 2023, analysts expect CVS’ revenue to increase 9.1% year-over-year to $351.77 billion, and EPS is expected to come at $8.60.

Furthermore, it has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Bottom Line

CVS stands in a formidable financial position, strengthened by optimistic analyst projections, attractive valuation metrics, solid profitability, and notable progress potential. The company also possesses additional commendable characteristics.

As proof of CVS’s commitment to rewarding its investors, it boasts an unbroken track record of paying dividends for the past 25 years. The firm recently announced its forthcoming quarterly dividend of $0.605 per share on common stock, payable to the shareholders on November 1, 2023.

It pays a $2.42 per share dividend annually, translating to a 3.39% yield on the current share price. Its four-year average dividend yield is 2.70%. The company’s dividend payouts have grown at a CAGR of 5.8% over the past three years and 3.4% over the past five years.

CVS' dividends seem well-covered, signaling prudent and efficient reinvestment of earnings by management. As of June 30, 2023, the company recorded retained earnings amounting to $58.87 billion, which can be utilized to invest in furthering its growth opportunities.

Nonetheless, the recent protests underline the urgent need for revamping the pharmacy industry with a renewed focus on pharmacist and patient safety. It is crucial for the management to promptly respond to these concerns to maintain stability within the company and optimally leverage ongoing industry trends.

CVS Health (CVS) Shakes up Pharma Market With Potential Biosimilar Game-Changer: Buy or Hold?

Biosimilars have been gaining traction lately as healthcare costs continue to rise. Biosimilars are attractive for healthcare companies as they can vie for a more significant share of the pie, given the extensive market for critical life-saving drugs. Fortune Business Insights expects the U.S. biosimilars market size to grow at a CAGR of 40.2% to reach $100.75 billion by 2029.

CVS Health Corporation (CVS) has jumped on the biosimilar bandwagon by launching a wholly-owned subsidiary named Cordavis, which will work directly with manufacturers to commercialize and/or co-produce biosimilar products. A biosimilar is a biologic medication highly similar to a biologic medication already approved by the U.S. Food and Drug Administration (FDA) – the original biologic (also called the reference product).

Biosimilars are considered safe and effective as they are made from the same types of resources and do not have any meaningful differences from the reference product. Cordavis will not undertake any research and development of drugs. Cordavis has contracted with Novartis AG’s (NVS) Sandoz to commercialize and co-manufacture Hyrimoz, a biosimilar for Humira, during the first quarter of fiscal 2024, under a Cordavis private level.

The list price of this biosimilar to be brought by Cordavis will be more than 80% lower than the current list price of Humira. CVS’ CFO Shawn Guertin said, “Cordavis is a logical evolution for us and will help ensure sufficient supply of biosimilars in the U.S. and support this market now and in the future, while ultimately improving health outcomes and reducing costs for consumers.”

CVS’ Chief Pharmacy Officer and Co-President of the Pharmacy and Consumer Wellness segment, Prem Shah, said, “We have a strategy to go after the products where we believe we can create the most value for customers, and for the US marketplace where we can increase the competition, lower the cost, and get that cost to consumers, and get these products to consumers at lower prices.”

JPMorgan analyst Lisa Gill said the contract with Sandoz is a volume-based transaction with only upside for CVS. In a note, she stated, “CVS has committed to purchasing a certain amount of volume from Sandoz, and management noted there are no additional capital commitments. CVS anticipates Cordavis will generate positive margins for commercializing the product, but it is too early to size the potential contribution.”

With sales of Humira totaling more than $21 billion last year, CVS now can grab a slice of this enormous market for the expensive and vital drug.

Here’s what could influence CVS’ performance in the upcoming months:

Mixed Financials

CVS’ total revenues for the second quarter ended June 30, 2023, increased 10.3% year-over-year to $88.92 billion. For the six months ended June 30, 2023, its net cash provided by operating activities increased 48.2% over the prior-year quarter to $13.35 billion.

Its adjusted operating income declined 10.4% year-over-year to $4.48 billion. The company’s adjusted income attributable to CVS Health declined 14.7% year-over-year to $2.85 billion. Also, its adjusted EPS came in at $2.21, representing a decline of 12.6% year-over-year.

Mixed Analyst Estimates

Analysts expect CVS’ EPS for fiscal 2023 to decline 1.2% year-over-year to $8.59. Its fiscal 2023 revenue is expected to increase 8.9% year-over-year to $351.01 billion. Its EPS for fiscal 2024 is expected to increase 1.2% year-over-year to $8.69. On the other hand, its fiscal 2024 revenue is expected to decline 2% year-over-year to $344.07 billion.

Discounted Valuation

In terms of forward EV/Sales, CVS’ 0.43x is 87.8% lower than the 3.51x industry average. Its 7.54x forward EV/EBITDA is 42.3% lower than the 13.08x industry average. Likewise, its 8.57x forward EV/EBIT is 49.2% lower than the 16.86x industry average.

Mixed Profitability

In terms of the trailing-12-month levered FCF margin, CVS’ 5.33% is significantly higher than the 0.22% industry average. Likewise, its 1.41x trailing-12-month asset turnover ratio is 273.4% higher than the industry average of 0.38x. Furthermore, its 5.42% trailing-12-month EBITDA margin is 5.2% higher than the industry average of 5.15%.

On the other hand, CVS’ 0.84% trailing-12-month Capex/Sales is 81.4% lower than the 4.52% industry average. Likewise, its 15.64% trailing-12-month gross profit margin is 71.8% lower than the 55.53% industry average.

Bottom Line

CVS’ entry into the world of biosimilar products through its newly launched subsidiary Cordavis is expected to help the company boost its revenues and improve its profit margins. However, the company faces competition from other companies making a biosimilar of Humira.

Moreover, the company has yet to communicate what it intends to do after launching the Humira biosimilar during the first quarter of fiscal 2024. Until the company shares its plans, it could be risky to invest in the stock.

Given its mixed fundamentals and profitability, it could be wise to wait for a better entry into the stock.

With Major Retail Stores Closing Down in 2023, What’s Next for These Stocks?

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

While the consumer price index only grew by 4% year-over-year, which is the slowest in 2 years, the picture wasn’t as optimistic when volatile food and energy prices were excluded. The core CPI was still 5.3% over the previous year, indicating that consumers still find their budgets stretched.
With the stash of stimulus cash fast dwindling, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

This further explains why even a 0.4% recovery in retail sales for April, after two consecutive months of decline, still fell short of Dow Jones’ estimate of 0.8%.

We had discussed earlier the implications of this slowdown for mid-tier retailers and the prospects of the retail industry vis-à-vis travel and hospitality.

Given the fact that legacy retailers such as Bed Bath & Beyond Inc. couldn’t be rescued (and has subsequently filed for Chapter 11 on April 23), and retailers are encouraging gamified shopping on Livestream, we will look at a few embattled retail stocks in the context of the accelerated pace of store closures with the ascent of online retail.

On May 26, the Illinois-headquartered integrated healthcare, pharmacy, and retailing company Walgreens Boots Alliance, Inc. (WBA) announced its decision to slash its corporate staff by about 10% in an effort to streamline operations.

The second-largest pharmacy store in the United States has been around since 1901. However, the financial hardships it has faced during the pandemic resulted in lost market share, which the retailer has begun clawing back with acquisitions of healthcare services operator VillageMD and urgent-care provider Summit Health and the launch of initiatives, such as drone delivery.

However, the empowerment of each store to serve broader areas more remotely has come at the cost of a reduction in the total number of locations. In October, the company announced a slew of store closures across states, such as New York, Kentucky, Florida, Massachusetts, and Colorado.

WBA’s stock has lost more than 22% of its value over the past six months, relative to an almost 9% gain for the S&P 500 over the same period.

Diversified health solutions company CVS Health Corporation (CVS) has been busy aligning itself with the pandemic-catalyzed trend of patients using digital technologies to manage their health. To this end, the retailer has acquired the well-known home healthcare agency Signify Health to further its medication delivery reach.

However, this reorganization has also been accompanied by store closures. While the economic stagnation caused by the pandemic caused CVS to lose over 20 stores towards the end of 2021, the company has since decided to proactively close 300 locations each year for the next three years as it hones in on digital strategy and implements a "new retail footprint strategy aligned to evolving consumer needs."

With the strategic realignment yet to bear fruit, store closures in Pennsylvania, North Carolina, Maryland, California, Florida, Texas, and Georgia, among other states, have also been accompanied by around 29% slump in CVS’ stock price, compared to 9% gain for the S&P 500.

The muted retail outlook discussed earlier has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed its earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.

Moreover, in February 2020, the retailer announced its three-year restructuring plan, pursuant to which it had decided to close 125 of “its least productive stores.” With closures in 2020, 2021, and 2022, M has, in the words of CEO Jeff Gennette, begun its ‘final stretch’ of store closures with four stores: one each in Los Angeles, California; Fort Collins, Colorado; Gaithersburg, Maryland; and Kaneohe, Hawaii.

Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from a previous range of $23.7 billion to $24.2 billion, while expected earnings per share of $2.70 to $3.20 is a major reduction from the previous guidance of $3.67 to $4.11.

M stock has plummeted by around 24% over the past six months, compared to the S&P500’s 9% gain over the same period.
Games and entertainment retailer GameStop Corporation (GME) was at the center of an unprecedented hype created by retail investors on social media forums when money was practically free, and inflation was ‘transitory.’

The hype created by an army of amateur traders in 2021 had less to do with the fundamentals of the company and more to do with the excitement of trading and a desire to short-squeeze professional speculators who were betting against it.

With online gaming more a norm than an exception, GME, which has been around since the 1980s, has seen a dramatic decrease in sales, resulting in many stores closing down and the company’s decision to transition into an exclusively online retailer.

In the fiscal first quarter that ended April 29, GME reported revenue of $1.24 billion, down from $1.38 billion in the year-ago period. Sales in the United States, Canada, and Australia dropped by 16.4%, 18.5%, and 8.9%, respectively, compared to the year-earlier period. This coincided with CEO Matthew Furlong's sudden firing and Ryan Cohen's appointment as executive chairman.

Since many e-commerce platforms offer viable alternatives for purchasing merchandise and hardware sold by the company, it is unclear how GME, with its own platform and fleet of e-commerce stores, would be able to differentiate itself from other players in this space and find its path to profitability.

How 3 Healthcare Stocks Are Capitalizing on the Consistent Rise of Virtual Care

Virtual care has been on the rise in the United States for some time now. However, the restrictions imposed by the COVID-19 pandemic have catalyzed the adoption of telehealth services in the country.

The numerous benefits of telehealth included expanding access to care, reducing disease exposure for staff and patients, preserving scarce supplies of personal protective equipment, and reducing patient demand on facilities.

According to the CDC, this resulted in a 154% increase in telehealth visits during the last week of March 2020, compared with the same period in 2019.
Barring the occasional spikes in infection from virus variants that seem to have become endemic, the U.S. and global economy has, by and large, put Covid 19 in its rearview mirror.

However, even as the tailwind of the pandemic has all but faded away, continued uptake, favorable consumer perception, and tangible investment into this space are all contributing to the continued growth of telehealth.

According to a Harvard Business Review report, increasing the frequency and scope of virtual care nationwide would transform American health, improving the lives of patients who get sick during nights and weekends, those with chronic conditions, and those who live in rural areas.
With telehealth arriving as a new reality for healthcare enterprises with innovations around virtual longitudinal care (both primary and specialty), remote patient monitoring, and self-diagnostics set to turbocharge the accessibility, scalability, and reach of healthcare, here are three businesses well-positioned to capitalize on this rising tide.

CVS Health Corporation (CVS)

CVS operates as a health solutions company. The company operates through four segments: Health Care Benefits; Health Services; Pharmacy & Consumer Wellness; and Corporate/Other. Its Health Services segment provides a full spectrum of pharmacy benefit management solutions, delivers health care services in its medical clinics, virtually and in the home, and offers provider enablement solutions.

Over the past three years, CVS’ revenue has grown at an 8.1% CAGR, while its EBITDA has grown at 4.5% CAGR. During the fiscal first quarter that ended March 31, 2022, CVS’ total revenues increased 11% year-over-year to $85.28 billion.

With the aim to advance its value-based care strategy, CVS completed its acquisition of Signify Health and Oak Street Health on March 29 and May 2 of this year, respectively.

Doximity, Inc. (DOCS)

DOCS provides a cloud-based platform for medical professionals in the United States. The platform helps its members collaborate with colleagues, coordinate patient care, conduct virtual patient visits, stay up-to-date with medical news and research, and manage careers.

DOCS’ topline has grown at a phenomenal 58.9% CAGR over the past three years. During the fiscal third quarter that ended December 31, 2022, its revenue increased 18% year-over-year to $115.3 million.

Ahead of its earnings release on May 16, analysts expect DOCS’ revenue for the fourth quarter and fiscal year that ended March 31, 2022, to increase by 17.6% and 21.7% year-over-year to $110.09 million and $418.16 million, respectively.

Teladoc Health, Inc. (TDOC)

TDOC operates in the health services segment and provides virtual access to care. The company’s portfolio of services and solutions includes various medical subspecialties, from non-urgent, episodic needs to chronic, complicated medical conditions.

Over the past three years, TDOC’s revenue has grown at a 59.8% CAGR, while its total assets have grown at a 39% CAGR over the same time horizon. During the fiscal first quarter that ended March 31, 2023, TDOC’s revenue increased by 11% year-over-year to $629,2 million.

For the fiscal second quarter, analysts expect TDOC’s revenue to increase 9.5% year-over-year to $648.78 million and its loss per share to narrow by 1.2%. For fiscal 2023, the company’s revenue is expected to increase by 9% over the previous year to $2.62 billion.