CVS's (CVS) OptumRx Win Belies Risk - Evercore ISI

November 29, 2016 10:01 AM EST
Get Alerts CVS Hot Sheet
Price: $81.56 -1.97%

Rating Summary:
    21 Buy, 8 Hold, 1 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 30 | Down: 30 | New: 23
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Evercore ISI analyst Ross Muken was positive on CVS Health (NYSE: CVS) after the company OptumRx (UNH) announced that they will offer the ability for OptumRx customers to fill 90-day prescriptions at either CVS retail pharmacies or via OptumRx home delivery. Additionally, the companies will offer improved consumer engagement tools and provide a shared pharmacy platform for consumers. The new 90-day benefit will be available to OptumRx commercial clients starting on July 1, 2017.

Muken commented, "Today’s announcement shows that CVS is still in fighting shape as it has removed a key area of potential long term conflict / concern. The bear thesis on CVS post several recent WBA wins (recently Prime Therapeutics and Tricare) is that CVS has been outcompeted (given PBM conflict risk) in the retail pharmacy space, which today’s announcement belies. The removal of this material risk shows that CVS will likely keep average or above average share at one of the fastest growing PBMs. (OptumRx has guided to 6-7% revenue growth at 4.5-4.7% margins for 2017 and long term targets of 5-8% revenue growth and 3-5% margins.) Given that OptumRx has ~400 MM commercial Rxs and CVS’s current market share, we estimate that today’s transaction could add 15-45 MM Rxs over the next 5-10 years. While the agreement probably pressures retail margins slightly, given the leverage from the “last Rx,” the additional Rxs likely generate ~$6-8 of GP/Rx and therefore could add $100-$300 MM of incremental EBIT over that period (modest incremental cost)."

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