Sixelderly women have just finished their morning chair yoga inside a CV in this Houston suburb.
“It’s peaceful, and you get a nice stretch,” says one. Another says she has been coming to this CVS store’s MinuteClinic for checkups and treatment for high blood pressure, as well as a nutrition plan that she tracks on her phone through a partnership with Noom, a diet app. “I log everything,” she says.
Why a CVS and not a doctor’s office? She cites the low cost, short waits, and follow-up calls, but really, it is Jesse, Jesse, Jesse. He is a care concierge, or single contact for the expanded list of services at this HealthHUB, one of three newly designed stores the company is testing in greater Houston. The stores offer a glimpse of how CVS plans to become the new front door of health care.
“We can make care more local, make it simpler, and help people achieve their best outcome at lower cost,” CEO Larry Merlo tells Barron’s. “We’re collecting data, and in the coming months, we’re going to have a picture of the path forward.”
Expect CVS to discuss its expansion plans for HealthHUB at a June investor day. The stock (ticker: CVS) has tumbled to a recent $53 from a peak of over $100 four years ago on stalled earnings growth and concerns that CVS’ margins as a drug-price negotiator will fall.
Complexity isn’t helping. Although parts of CVS are as familiar as the pre-Easter migration of marshmallow Peeps to store shelves, other parts of the company are deeply entangled in how medicine and care are administered, priced, and paid for, and how the government’s role might change. There are overlapping financial interests, but also competing ones.
Yet, CVS’ assets also leave it uniquely well positioned for a future when consumers gain more control over health care, and prices fall. Time to buy the shares.
so large that we
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so large that we
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After a half-century of rolling up U.S. drugstore chains, CVS is the country’s biggest prescription filler. It has 9,900 stores, and 1,100 of them have walk-in MinuteClinics, making these nearly as numerous in the U.S. as for-profit hospitals.
Through its Caremark unit, CVS is also a pharmacy benefit manager, or PBM, squeezing drugmakers for discounts on behalf of group buyers. And with last year’s $70 billion acquisition of Aetna, CVS provides workplace and government health plans, including Medicare Advantage coverage, whereby private companies manage Medicare benefits.
Aetna is the key. Many companies can profit from rising prices, but health plans—especially those that can steer patients to their own facilities for care—benefit from driving costs lower. A wild card: a federal judge is reviewing the terms of a government settlement last fall that allowed the merger.
This year, an estimated 40% of CVS’ operating profits will come from its stores, including the drug counters and Omnicare, which provides pharmacy services to long-term care facilities. The remaining 60% of profits will come from roughly equal contributions from Aetna and the PBM.
The PBM has contributed richly to growth over the years. CVS’ adjusted earnings per share have quadrupled since it bought Caremark in 2007. Now, three companies dominate the PBM market: CVS;
(CI), through its purchase last year of Express Scripts; and UnitedHealth Group (UNH), with its OptumRx unit.
* Aug. fiscal year E= Estimate
PBMs and drugmakers have been blaming each other for rising pharmaceutical costs. Prescription-drug prices have increased 99% over the past two decades, versus 53% for broader inflation, but that understates price gains for many branded drugs, even seasoned ones. Insulin has been used to treat diabetes for nearly a century. But from 2012 to 2016, the cost of insulin for Type 1 diabetes doubled.
The secrecy surrounding pricing details in pharmacy benefit management doesn’t help with public relations. In a Senate Finance Committee hearing with executives last Tuesday, the Republican chairman complained of “little insight into the workings” of the businesses, and the top Democrat called them “gnarled, confounding riddles.”
A recent analysis by Bernstein analyst Lance Wilkes found that if PBM margins were brought in line with those of other players in the drug supply chain, including distributors, health plans, and pharmacies, CVS’ pretax PBM profits might fall to $3 billion from about $5 billion.
“We see this as a near worst-case scenario,” Wilkes wrote. Still, it is worth considering as a baseline for pessimism. A decline like that would cut CVS’ adjusted EPS to $5.77 from just over $7 last year, but it would also reduce the risk embedded in current earnings, according to Wilkes. Under that scenario, the stock could be worth $60, or a little over 10 times earnings. That still implies a gain of 13%.
CVS recently introduced a more transparent PBM option, under which all of the rebates would go to the client. One bright spot for CVS is a fee-generating agreement with the health insurer
(ANTM) to help it create its own pharmacy benefit manager to replace its recent provider, Express Scripts.
There’s a near-term pinch, however. Contracts for CVS’ PBM guarantee certain rebates, based on predicted inflation rates that aren’t occurring. Although it might not feel like it, prescription-drug prices have been gently falling year over year in recent months. CVS could be on the hook for any rebate shortfalls, cutting into results for the next year or two, until new contracts are signed.
The outlook for Aetna is more straightforward. It has been enjoying fast growth in Medicare Advantage plans. Growth is slower in workplace plans, but margins are higher. And CVS says it’s on track to exceed a promised $750 million in yearly cost savings by 2020 from the Aetna acquisition.
Aetna and other managed-care organizations are often at the center of debate over how to reshape health care to bring down costs. A Medicare-for-all proposal recently reintroduced by Sen. Bernie Sanders of Vermont would eliminate managed care entirely, in favor of a single government payer—a catastrophic outcome for CVS and others.
But realistically, managed care is a trillion-dollar industry; legislating it away would leave a deep hole in the economy in the near term.
For now, reforms appear likely to focus on bolstering Medicare and improving the Affordable Care Act, which has greatly increased the number of insured individuals, but has shown uneven results in making care affordable. Both paths bode well for Aetna. On the other hand, there is a new tax on generous workplace plans scheduled to start in 2022 under the ACA.
All told, Aetna looks poised for profit growth in the mid- to high-single digits in coming years. Soon, it could also nudge patients toward HealthHUBs instead of emergency rooms for nondire conditions, reducing its payments and increasing plan profits, while bringing new high-margin revenue to stores.
and Anthem have acquired urgent-care centers and other health-care providers for similar reasons, but they lack CVS’ vast retail presence.
Bernstein’s Wilkes predicts that CVS will spend $10 billion in the years ahead to acquire urgent-care centers, physician groups, and other care providers. “While management’s current posture appears to be a slow build of the care delivery at retail capabilities, we expect that CVS will become much more aggressive,” he writes.
For now, the company will focus on its stores, where the near-term outlook is mixed but the long-term potential is large.
CVS cites estimates suggesting that $500 billion of annual spending on chronic diseases is wasted. That is a large enough number to allow insurgents to undercut the current system, while profiting handsomely.
Even for CVS, which could generate more than $9 billion in free cash this year, the growth potential is significant.
“The cost-reduction opportunities are so large that we don’t have to be 100% right on this,” Merlo, the CEO, says. “We won’t be afraid to suboptimize one element of our business, because we’re thinking about the whole thing.”
CVS stores today face challenges similar to those of any general merchandise retailer, apart from
(AMZN). At the drug counter, the number of prescriptions is growing nicely. This is offset by reimbursement pressures and a dearth of new generics. CVS also recently marked down the value of its pharmacy long-term care business, citing weakness at skilled nursing facilities. Combined with a previous markdown, the amount works out to about half of the $12.9 billion that CVS paid for Omnicare in 2015.
Estimated 2019 Operating Profits
Estimated 2019 Operating Profits
Sources: company reports; Bernstein estimates and analysis
Amazon last year bought an online prescription start-up called PillPack, giving it a small, but nationwide, presence in the business and putting drugstore chains on notice.
CVS is well positioned to defend its share in the near term, especially with Aetna, which can keep Amazon off its list of outside pharmacy partners. As smaller chains struggle, CVS could even gain business from Amazon’s entrance. CVS recently introduced same-day delivery of prescriptions.
But while many drug plans have steered patients to mail order programs for discounts on bulk purchases of medicines, CVS has offered the option to pick up orders in stores at the same price. This increases store traffic and add-on purchases. If Amazon drives broader use of online drug delivery, CVS will need another way to attract traffic.
That brings us back to Houston.
Important features separate a HealthHUB from a regular store. The yoga studio has a divider that turns it into workspaces for a respiratory therapist and nutritionist when there are no classes. Shoppers in the center of the store see only opaque blue walls around the space with giant letters that spell “wellness.” On the other side of the store, the MinuteClinic has three examination rooms and a vocational nurse to assist the nurse practitioner.
Part of CVS’ plan for rapid care expansion is to use nurse practitioners and physicians assistants, who can prescribe medicine. This overcomes a shortage of primary-care doctors and keeps down costs. Nurse practitioners and physician assistants are technically supervised by off-site physicians, face a shorter educational path than traditional doctors, and earn just over $100,000 a year, on average, versus about $210,000 for primary-care doctors.
Does CVS represent the future of health care? Write us at firstname.lastname@example.org and we may publish your take. Find out more at barrons.com/mailbag.
The company aims to offer 80% of the services of a primary-care physician, with a focus on chronic disease. Houston was chosen for its large concentration of Aetna members, but also for its high rates of obesity and diabetes.
HealthHUBs have in-house blood labs, allowing for near-instant results for tests for cholesterol levels, blood glucose, strep throat, mononucleosis, flu, adenovirus (associated with pinkeye), and something called hemoglobin A1c, a marker for diabetes. More tests are coming, with a focus on women’s health. There is a machine to test instantly for diabetic retinopathy, a leading cause of blindness.
To make room for these new services, about 20% of general merchandise has been removed from CVS stores. This includes slow sellers and modest earners: toys, books, car products, magazines, and floor cleaners. Although there are still Peeps, chocolate bunnies, and baskets for Easter, seasonal goods have been scaled back.
Elsewhere is a section that one worker has nicknamed the “parking lot,” filled with walkers, knee scooters, and other mobility aids, down to precut tennis balls with CVS logos to attach to walker legs. One CVS insider who went in for knee-replacement surgery realized afterward how ill-prepared he was at home for the recovery, the company says. Now, there is a push to provide bundles of products that Merlo calls “surgery recovery in a box.”
Many MinuteClinic visitors have insurance but lack a primary-care physician. Merlo says that CVS can refer one, and wants to complement doctors’ offices, rather than compete with them.
Tristesse Casimier, a Houston social worker who frequently visits with the elderly in their homes, says some use MinuteClinics when there’s a long wait for doctor appointments or because they don’t want to drive into the middle of the city. “There’s a CVS around every corner,” she says. Indeed, 70% of the U.S. population lives within three miles of one.
Still, there is plenty of competition. “Urgent-care clinics have been popping up all over the place,” Casimier notes.
It’s not just clinics. This past week,
issued a report predicting that Apple will “emerge as a leader in consumer-centric health care” with its enormous user base for phones and watches and its HealthKit development platform for apps.
Alexa, Amazon’s voice assistant, can now transfer sensitive health information using regulator-approved software, The Wall Street Journal reported this past week. Patients could soon use Alexa-enabled devices for things like tracking drug deliveries and scheduling care.
Aetna, an early development partner with Apple, introduced a new program this year whereby patients can receive an Apple Watch and gradually pay it off by earning reward points for healthy behavior, tracked by an app called Attain. Patients can be prompted to refill prescriptions or go for checkups.
CVS already has smartphone apps that customers can use to check wait times at nearby MinuteClinics, host virtual doctor visits through a deal with
(TDOC), and manage Aetna benefits and CVS shopping rewards, among other things. “Digital is a high priority,” Merlo says.
For stock investors, the near-term financial minuses and pluses amount to this: A company with a long record of reliable earnings growth is unlikely to increase profits at all this year. Charles Rhyee, who covers CVS for Cowen & Co., expects a two-year wait before earnings pick up. Yet he also rates the shares at Outperform and sees potential for more than 25% upside over the next year.
How’s that? The bar is exceptionally low. CVS trades at less than eight times earnings, versus 14 times, on average, over the past five years. It is discounted by more than 50% to both the S&P 500 index and UnitedHealth shares, relative to earnings.
The Aetna deal has left the company with $71 billion in debt—high, but manageable. It may take several years for CVS to reduce that to a level that allows it to resume stock buybacks and dividend increases, especially if it buys care facilities. For now, investors must content themselves with the existing dividend, but with the stock price so low, the yield has plumped up to 3.8%.
Near-term targets for the stock are guesswork, of course. Even a 20% return over the coming year would leave the shares deeply discounted. Gains could depend upon HealthHUB, the spending plan, and whether weak business lines like long-term care can stabilize.
Investors who buy CVS stock today take a risk, but that seems to be reflected in the price, and then some.
As consumers gain more control over care, the days of easy, steady profit gains for health care may be winding down. The group has recently lagged behind a rally for utilities and other defensive shares.
If traditional health-care players are vulnerable, however, it’s better to invest in one whose reckoning has already come, and that has the right assets and an early plan for profiting from health-care disruption, rather than succumbing to it.
“这是和平的，你会得到一个很好的延伸，”一位说。另一位发言人表示，她已经来到这家 CVS 店的 MinuteClinic 进行高血压的检查和治疗，并通过与饮食应用 Noom 的合作，在手机上追踪营养计划。“我记录了一切，”她说。
为什么要 CVS 而不是医生的办公室？她引用了低成本、短时间等待和跟进电话，但实际上，这是杰西，杰西，杰西。他是一个护理人员，或单一接触扩大名单的服务在这个健康 HUB ，其中三个新设计的商店公司正在测试大休斯顿。这些商店提供了 CVS 计划如何成为新的医疗保健前门的一瞥。
首席执行官拉里•梅洛( Larry Merlo )告诉 Barron ’ s ：“我们可以让护理变得更本地化、更简单，并帮助人们以更低的成本实现最佳结果。”“我们正在收集数据，在未来几个月里，我们将看到未来的道路。”
预计 CVS 将在6月的投资者日讨论其 HealthHUB 的扩张计划。由于利润增长陷入停滞，以及担心 CVS 作为药品价格谈判代表的利润率将下降，该股（股票代码： CVS ）从四年前逾100美元的峰值跌至最近的53美元。
复杂性没有帮助。尽管 CVS 的部分内容与复活节前马绍尔集团( Marsmallow Peeps )迁往商店货架的做法一样熟悉，但该公司的其他部分却深深纠结于药品和护理的管理、定价和支付方式，以及政府的角色可能如何改变。金融利益是相互重叠的，但也是相互竞争的。
然而， CVS 的资产也让它在消费者对医疗保健获得更多控制权、价格下跌时，处于独特的有利位置。购买股票的时间。
经过半个世纪的发展， CVS 成为美国最大的处方填充剂。它有9,900家商店，其中1,100家已经进入了美国的小型诊所，这使得美国的数量几乎和盈利性医院一样多。
通过它的 Caremark 单位， CVS 也是一个药房利益经理，或 PBM ，挤压制药商代集团买家折扣。去年以700亿美元收购了 Aetna ， CVS 提供了工作场所和政府健康计划，包括 Medicare Advantage 保险，由私营公司管理 Medicare 福利。
今年， CVS 约40%的营业利润将来自其门店，包括为长期护理设施提供药房服务的药店柜台和 Omnicare 。其余60%的利润将来自安泰和 PBM 的大致相等的贡献。
多年来， PBM 为增长做出了巨大贡献。自2007年收购 Caremark 以来， CVS 调整后的每股收益翻了两番。现在，三家公司主导着 PBM 市场： CVS ；
（ CI ）去年通过购买 Express Scripts 和 UnitedHealth Group （ UNH ）及其 OptumRx 部门。
*8月会计年度 E =估计数
药品效益管理中定价细节的保密不利于公共关系。在参议院财政委员会( Senate Finance Committee )上周二与企业高管举行的听证会上，这位共和党主席抱怨称，“对企业运作的了解很少”，民主党高层称这些企业是“令人毛骨悚然、令人困惑的谜团”。
伯恩斯坦( Bernstein )分析师兰斯•威尔克斯( Lance Wilkes )最近的一项分析发现，如果 PBM 利润率与药品供应链的其他参与者（包括分销商、健康计划和药店）一致， CVS 税前 PBM 利润可能从50亿美元左右降至30亿美元。
“我们认为这几乎是最糟糕的情况，”威尔克斯写道。尽管如此，它仍值得作为悲观情绪的基准。Wilkes 表示，这样的下降将使 CVS 调整后的每股收益从去年的略高于7美元降至5.77美元，但也会降低当前收益中蕴含的风险。在这种情况下，该股可能价值60美元，或略高于10倍的收益。这仍然意味着收益13%。
CVS 最近推出了一种更透明的 PBM 选项，根据该选项，所有回扣都将交给客户。CVS 的一个亮点是与健康保险公司达成一项收费协议
（ ANTOM ）帮助其创建自己的药房收益管理器，以取代其最近的提供者 Express Scripts 。
然而，这是一个短期的夹子。CVS PBM 的合同保证了一定的回扣，基于预测的通胀率，而这些通胀率并未发生。尽管它可能感觉不到，但近几个月来处方药价格一直在缓慢下降。CVS 可能会因任何回扣短缺而陷入困境，在新合同签署之前，这会影响到未来一两年的业绩。
安泰的前景更为直截了当。它一直享受着快速增长的 Medicare Advantage 计划。工作场所计划的增长较慢，但利润率较高。CVS 表示，到2020年，通过收购 Aetna ，每年节省的成本有望超过承诺的7.5亿美元。
Aetna 和其他管理保健组织经常处于关于如何重塑医疗保健以降低成本的辩论中心。最近由参议员重新提出的“全民医保”提案。佛蒙特州的伯尼•桑德斯( Bernie Sanders )将完全取消管理式医疗，支持单一的政府支付者——这对 CVS 和其他机构来说是灾难性的后果。
目前，改革似乎将重点放在支持医疗保险和改善平价医疗法案，这大大增加了参保人数，但在使医疗负担得起方面却显示出不均衡的结果。这两条路对安泰来说都是好兆头。另一方面，对根据 ACA 计划于2022年开始的慷慨工作场所计划征收新税。
总的来说，安泰在未来几年有望实现利润增长，达到中高位数。很快，它还可以将患者推向 HealthHUB ，而不是急诊室，以适应非恶劣条件，减少付款，增加计划利润，同时为商店带来新的高利润收入。
由于类似原因， Anthem 已经收购了紧急护理中心和其他医疗服务提供商，但它们缺乏 CVS 庞大的零售业务。
Bernstein 的 Wilkes 预测 CVS 将在未来几年花费100亿美元收购紧急护理中心、医师团体和其他护理提供者。他写道：“尽管管理层目前的姿态似乎是零售能力护理服务的缓慢构建，但我们预计 CVS 将变得更加激进。”
即使对 CVS 来说，增长潜力也很大。 CVS 今年的自由现金收入可能超过90亿美元。
目前 CVS 商店面临的挑战与普通商品零售商相似，除了
( AMZN )。在药品柜台，处方的数量增长很好。这被报销压力和新仿制药的缺乏所抵消。CVS 最近还下调了其药房长期护理业务的价值，理由是熟练护理设施薄弱。再加上之前的降价， CVS 在2015年为 Omnicare 支付的129亿美元中，大约有一半是这样的。
亚马逊( Amazon )去年收购了一家名为 PillaPack 的在线处方初创企业，使其在全国范围内只有一小部分业务，并将药店连锁企业置于关注之下。
CVS 在短期内很有能力捍卫自己的份额，尤其是与 Aetna 的份额，后者可以使亚马逊远离其外部药房合作伙伴的名单。随着较小的连锁企业苦苦挣扎， CVS 甚至可以从亚马逊的入口获得业务。CVS 最近推出了当日给药。
但是，尽管许多药品计划都引导患者邮寄药品批量采购折扣的订单计划， CVS 还是提供了以同样的价格在商店里接受订单的选择。这增加了存储流量和附加购买。如果亚马逊推动更广泛地使用在线药品， CVS 将需要另一种方式来吸引流量。
重要功能将 HealthHUB 与常规商店分开。瑜伽工作室有一个分隔器，当没有课的时候，它会变成呼吸治疗师和营养师的工作场所。商店中心的顾客只看到周围不透明的蓝色墙壁，上面写着“健康”的巨字母。在商店的另一侧，分钟诊所有三个检查室和一个职业护士协助护士执业。
CVS 是否代表了医疗保健的未来？在 mail @ barrons.com 上给我们写信，我们可以发布你的简历。在军营里找更多的东西。com / mailbag 。
该公司的目标是提供80%的服务的初级保健医生，重点是慢性疾病。休斯顿之所以被选中是因为它集中了大量的 Aetna 成员，同时也是因为它的高肥胖率和糖尿病。
健康的 HUB 有内部的血液实验室，可以对胆固醇水平、血糖、链喉、单核细胞增多症、流感、腺病毒（与 pinkeye 相关）和糖尿病的标志物血红蛋白 A1c 进行即时检测。更多的测试正在进行，重点是妇女的健康。有一台机器可以立即测试糖尿病性视网膜病变病变，这是导致失明的主要原因。
为了给这些新的服务腾出空间，大约20%的普通商品已从 CVS 商店移走。这包括销售缓慢和收入微薄的人：玩具、书籍、汽车产品、杂志和地板清洁工。虽然仍然有 Peeps ，巧克力兔子和篮子复活节，季节性商品已经缩减。
在其他地方，一名工人给“停车场”起了绰号，里面装满了步行者、膝上型踏板车和其他移动辅助设备，还有带有 CVS 标志的前排网球，可以连接到步行者的腿上。该公司表示，一位参加了膝盖置换手术的 CVS 内部人士事后意识到，他在家中对复苏准备不足。现在，人们正在努力提供 Merlo 称之为“盒子里的手术康复”的一系列产品。
许多分钟门诊的游客都有保险，但缺少初级保健医生。Merlo 说 CVS 可以引用其中的一个，并希望补充医生的办公室，而不是与他们竞争。
休斯顿的一名社会工作者，经常在家中与老年人见面。他说，有些人在等待医生预约的时间很长，或者因为他们不想开车到市中心去的时候使用分钟诊所。“每个角落都有 CVS ，”她说。事实上，美国70%的人口生活在1英里以内。
发布的一份报告预测，苹果将“成为以消费者为中心的医疗保健领域的领导者”，拥有庞大的手机和手表用户基础，以及应用程序的 HealthKit 开发平台。
据《华尔街日报》上周报道，亚马逊语音助手 Alexa 现在可以使用监管机构批准的软件传输敏感健康信息。患者可能很快就会使用 Alexa 支持的设备来跟踪药物的交付和安排治疗。
Aetna 是苹果公司的早期开发合作伙伴，今年推出了一项新的计划，患者可以接受苹果手表（Apple Watch），并通过一款名为 Atain 的应用程序获得健康行为奖励积分，逐步获得回报。患者可以被提示补充处方或去检查。
管理 Aetna 福利和 CVS 购物奖励等。“数字是一个高度优先事项，” Merlo 说。
对股票投资者而言，近期的财务状况和获利相当于这一点：一家有着可靠盈利增长记录的公司今年不太可能增加利润。负责 Cowen & Co 的 CVS 的查尔斯•莱耶( Charles Rhyee )预计，在盈利回升之前，公司将等待两年时间。然而，他也对 Outperformance 的股票进行了评级，并认为未来一年有可能上涨超过25%。
Aetna 的交易让该公司背负了710亿美元的债务，虽然数额很高，但仍可管理。CVS 可能需要几年时间才能将这一水平降低到可以恢复股票回购和增加股息的水平，尤其是如果它购买了护理设施。目前，投资者必须满足于现有的股息，但由于股价如此之低，收益率已高达3.8%。
当然，该股近期的目标是猜测。即使是未来一年20%的回报率，也会让股价大幅打折。收益可能取决于支出计划 HealthHUB ，以及长期护理等薄弱业务线能否稳定。
今天购买 CVS 股票的投资者承担了风险，但这似乎反映在价格上，然后是一些。