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CVS Health (CVS) New Opportunities Drive Growth, Macro Woes Stay

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CVS Health’s (CVS - Free Report) restructuring plan, intended to streamline and simplify the organization, looks impressive. Strategic buyouts should drive growth. However, rising pressure to reduce reimbursement rates for generic drugs and a highly competitive market provide stiff challenges to CVS Health. The stock carries a Zacks Rank #3 (Hold).

CVS Health is committed to increasing investments in fast-growing spaces like enterprise data platforms, cloud capabilities and digital products to offer innovative solutions through mobile and web channels. The company is investing in emerging technology capabilities such as voice, artificial intelligence and robotics to automate, reduce cost, and improve the experience for its constituents.

The company has been removing barriers to digital adoption and making it easier for customers to access the services they seek, such as pharmacy refills and advanced scheduling for immunizations online. The company’s solid digital engagement and enhanced capabilities will strengthen its ability to drive seasonal flu and RFD immunization awareness and connect patients to CVS locations for these important health services. The company focuses on innovating and delivering experiences that matter most to customers, which is driving digital growth. Per the latest update, year to date, the company exceeded 55 million unique digital customers, up nearly 20% from last year’s levels.

Following the colossal acquisition of health insurance giant Aetna, CVS Health introduced its Health Care Benefits business arm. This segment manages drug cost trends and brings innovative clinical solutions to the market.

CVS Health Corporation Price

CVS Health Corporation Price

CVS Health Corporation price | CVS Health Corporation Quote

Medical membership continues to increase, reflecting broad-based growth, including individual exchange, Medicare and commercial membership. Within the healthcare benefits segment, revenues increased nearly 17%.

Medical membership in the third quarter of 2023 grew to 25.7 million, an increase of 1.4 million members versus the prior year, reflecting growth across multiple product lines, including individual exchange, Medicare, and commercial. The restoration of Medicare Star ratings is partly responsible for the strong results.

On the third-quarter earnings call, the company stated that Aetna continues to be a leader in zero-dollar premium products and approximately 84% of Medicare eligibles will have access to Aetna plans in this category in 2024. The company is also expanding the breadth of its D-SNP footprint (which focuses on offering the coordinated medical management these members need to live a healthier life, including introducing them to care delivery options such as Oak Street Health, where appropriate) and now covers more than two-thirds of Medicare eligibles, up 6% from last year. CVS Health’s ability to offer access to convenient sites of care and the integrated benefits that seniors value most will position it to grow at or above the market in 2024.

On the flip side, a significant portion of CVS Health’s net revenues is derived directly from Medicare, Medicaid and other government-sponsored healthcare programs. The company is, therefore, subject to federal and state reimbursement laws and regulatory requirements, anti-remuneration laws, the Stark Law and/or federal and state false claims laws.

CVS Health’s retail pharmacy, specialty pharmacy and LTC pharmacy operations have been affected by reimbursement pressure caused by competition, including client demand for lower prices, generic drug pricing, earlier-than-expected generic drug introductions and network reimbursement pressure. If a company is unable to increase its prices to reflect or otherwise mitigate the impact of increasing costs, its profitability will be affected. If the company is unable to limit its price increases, it may lose customers to competitors with more favorable pricing.

In the third quarter, the reimbursement pressure within the pharmacy business continued despite some stabilization. The company is making continued efforts to combat this reimbursement pressure by increasing volume and reducing costs.

Adverse economic conditions in the United States and abroad are adversely impacting CVS Health’s businesses, operating results and financial condition. The businesses are currently affected by the U.S. economy and consumer confidence in general. Outside the United States, economic factors like inflation and changes in consumer purchasing power, preferences or spending patterns are concerns.

The company does not expect these conditions to improve in the near future. Further, an unfavorable economic environment could cause a decline in drug utilization, and dampen demand for PBM services as well as consumer demand for products sold in CVS Health’s retail stores.

The challenging macroeconomic conditions are resulting in a significant escalation in the company’s costs and expenses. During the third quarter, the company’s total cost (including Benefit Costs) rose 8.6%.

Key Picks

Some better-ranked stocks in the broader medical space are Insulet (PODD - Free Report) , Haemonetics (HAE - Free Report) and DexCom (DXCM - Free Report) . While Insulet presently sports a Zacks Rank #1 (Strong Buy), Haemonetics and DexCom carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Estimates for Insulet’s 2023 earnings per share have increased from $1.61 to $1.90 in the past 30 days. Shares of the company have plunged 40.9% in the past year compared with the industry’s decline of 7%.

PODD’s earnings surpassed estimates in the trailing four quarters, the average surprise being 105.1%. In the last reported quarter, it delivered an average earnings surprise of 77.4%.

Haemonetics’ stock has risen 11.6% in the past year. Earnings estimates for Haemonetics have increased from $3.82 to $3.86 for 2023 and from $4.07 to $4.11 for 2024 in the past 30 days.

HAE’s earnings beat estimates in each of the trailing four quarters, delivering an average surprise of 16.1%. In the last reported quarter, it posted an earnings surprise of 5.3%.

Estimates for DexCom’s 2023 earnings per share have increased from $1.23 to $1.41 in the past 30 days. Shares of the company have fallen 7.8% in the past year compared with the industry’s decline of 7.1%.

DXCM’s earnings surpassed estimates in the trailing four quarters, the average surprise being 36.4%. In the last reported quarter, it delivered an average earnings surprise of 47.1%.

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