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CVS Health Battles Competition with Strategic Acquisitions

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On Mar 28, 2016, we issued an updated research report on Rhode Island-based pharmacy retail giant CVS Health Corp. (CVS - Free Report) , which provides integrated offerings across the entire spectrum of pharmacy care.

CVS Health recently posted a mixed fourth-quarter 2016 with adjusted EPS in line with the Zacks Consensus Estimate. Year-over-year growth in adjusted earnings was impressive. Moreover, revenues exceeded the estimate with Pharmacy Services benefiting from growth in specialty pharmacy business and Retail Pharmacy gaining from increased same store sales.

CVS Health’s recently included Omnicare business has been split across both its PBM and retail segments. The buyout also reflects the company’s foray into a new pharmacy distribution channel – the long-term specialty care market. CVS Health currently expects Omnicare to be accretive by approximately 20 cents to its 2016 earnings per share (excluding any transaction and integration costs).

Further, its $1.9 billion acquisition of the pharmacy and clinic businesses of retail giant Target Corporation reflects a bold move on CVS Health’s part to enhance its presence across the country by expanding into new markets such as Seattle, Denver, Portland and Salt Lake City. Post the closure of the deal, CVS Health will have control over Target’s 1,672 pharmacies across 47 states, which the former will operate through a store-within-a-store format, branded as CVS/pharmacy. Moreover, all new Target stores that provide pharmacy services will incorporate a CVS/pharmacy in it.

Meanwhile, according to recent data, 3 million people in the U.S. are currently in need of specialty treatment and the potential cost of treatment tends to be very high. With management emphasizing that CVS Health’s specialty business remains a top priority for customers, we believe the company is well positioned to capitalize on this opportunity based on its broad, differentiated offerings which include the likes of Specialty Connect.

On the flip side, rising pressure from health maintenance organizations, managed care organizations, PBM companies, government entities, and other third party payers to reduce prescription drug costs and pharmacy reimbursement rates are expected to impact CVS Health’s profitability.

Additionally, in the highly competitive retail pharmacy business, shareholders of CVS Health anticipate severe competitive threat from the $17.2 billion mega merger between Walgreens and Rite Aid, once the deal gets over. Also, the sluggish economic conditions in the U.S. might hamper the company’s profit margin.

The stock currently has a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some better-ranked medical stocks are Baxter International Inc. (BAX - Free Report) , OraSure Technologies, Inc. (OSUR - Free Report) and Hill-Rom Holdings, Inc. (HRC - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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