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$CVS is not just any corner drug store chain. It controls the nation's
* largest Pharmacy Benefits Manager (Caremark)
* third-largest US health insurance company (Aetna),
* largest pharmacy chain (CVS Pharmacy).
It falls dead center in the too-big-to-fail category.
* largest Pharmacy Benefits Manager (Caremark)
* third-largest US health insurance company (Aetna),
* largest pharmacy chain (CVS Pharmacy).
It falls dead center in the too-big-to-fail category.
No really, how big is it?
* 5 million people walk into $CVS stores every single day.
* 75 million people are in their rewards program.
* 70% of US population lives within 3 miles of a CVS.
* 105M members of Caremark buy almost 1/3rd of the drugs dispensed in this country.
* 5 million people walk into $CVS stores every single day.
* 75 million people are in their rewards program.
* 70% of US population lives within 3 miles of a CVS.
* 105M members of Caremark buy almost 1/3rd of the drugs dispensed in this country.
But how big is it compared to competitors?
* PBMs : Caremark 30%; Express Scripts 23%; OptumRx 23%;
* Pharmacy: CVS 24%; Walgreens 19%; Cigna 10%; United Health 7%; Walmart 5%; Kroger 3%
* Insurance Members : United Health 70M; Anthem 40M; Aetna 22M; Cigna 20M; Humana 16M;
* PBMs : Caremark 30%; Express Scripts 23%; OptumRx 23%;
* Pharmacy: CVS 24%; Walgreens 19%; Cigna 10%; United Health 7%; Walmart 5%; Kroger 3%
* Insurance Members : United Health 70M; Anthem 40M; Aetna 22M; Cigna 20M; Humana 16M;
There are 6 key categories in drug value chain :
* Drug Manufacturer
* Wholesaler
* Pharmacy Retailer
* Pharmacy Benefit Manger
* Health Insurer
* Hospitals & Clinics
$CVS is the main player in 3 categories. MinuteClinic/HealthHUBs are their way into Clinics space.
* Drug Manufacturer
* Wholesaler
* Pharmacy Retailer
* Pharmacy Benefit Manger
* Health Insurer
* Hospitals & Clinics
$CVS is the main player in 3 categories. MinuteClinic/HealthHUBs are their way into Clinics space.
Vertical Integration :
* With the purchase of Aetna, they are now vertically integrated across 3 primary segments in the Rx value chain. This enables them to get a holistic picture of their customers, cross sell across verticals and reduce costs through synergies.
* With the purchase of Aetna, they are now vertically integrated across 3 primary segments in the Rx value chain. This enables them to get a holistic picture of their customers, cross sell across verticals and reduce costs through synergies.
* If a patient insured by Aetna and buys drugs from CVS pharmacy, Caremark will be able to provide cheapest prices for the drug. They can pass some of the margins back to the customer, forming a closed feedback loop.
HealthHUB :
* Part of CVS’s 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. Ultimately reducing costs to Aetna and other insurers.
* Part of CVS’s 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. Ultimately reducing costs to Aetna and other insurers.
* The plan is to combine Aetna’s claims data and analytics that identify which of its 22 million members are at risk for, say, developing diabetes or cardiac disease, with CVS’s capacity to guide them to testing and treatment before the disease progresses.
* Currently for Aetna Connected Plan members pay $0 copay at local HealthHub and MinuteClinic locations.
* The plan is to build 1500 HealthHUBs out of 10K stores by 2021.
* Through HealthHUBs they are entering into chronic and preventative care space.
* The plan is to build 1500 HealthHUBs out of 10K stores by 2021.
* Through HealthHUBs they are entering into chronic and preventative care space.
Margin of safety :
* There's a natural hedge among the 3 operating units within $CVS. If PBMs lose money, usually insurers and pharmacy gain money. The same is true the other way around. This provides a margin of safety for the enterprise as a whole.
* There's a natural hedge among the 3 operating units within $CVS. If PBMs lose money, usually insurers and pharmacy gain money. The same is true the other way around. This provides a margin of safety for the enterprise as a whole.
* With 3 operating units under single enterprise roof, It makes them agnostic to where value is being created across the organization.
* Doesn't matter where it comes from, all is well as long as FCF is being generated for the enterprise as a whole.
* Doesn't matter where it comes from, all is well as long as FCF is being generated for the enterprise as a whole.
Aetna and Debt :
* $CVS purchased Aetna for $69B in 2017. Gathered $40B in debt. They have paid off $12B so far.
* Paying down approximately $5B debt per year. They expect to be at 3x debt to ebitda by 2022.
* $CVS purchased Aetna for $69B in 2017. Gathered $40B in debt. They have paid off $12B so far.
* Paying down approximately $5B debt per year. They expect to be at 3x debt to ebitda by 2022.
Capital Allocation :
Cashflow from operations is used for three things :
* invest in the future (HealthHUBs/Digital Transformations)
* maintain quarterly dividends
* reduce debt.
They are committed not to repurchase shares, until they are at 3x leverage.
Cashflow from operations is used for three things :
* invest in the future (HealthHUBs/Digital Transformations)
* maintain quarterly dividends
* reduce debt.
They are committed not to repurchase shares, until they are at 3x leverage.
Guidance is low double digit growth beyond 2022.
Growth areas :
* Continue gaining insurance business from government programs.
* Maintain low churn and win new businesses in PBM space.
* Increased engagement through loyalty and subscriptions in retail pharmacy.
Growth areas :
* Continue gaining insurance business from government programs.
* Maintain low churn and win new businesses in PBM space.
* Increased engagement through loyalty and subscriptions in retail pharmacy.
Covid catalysts :
* With vaccine distribution, they have expanded the database of customer information.
* CVS became a omni-channel health service provider through 2020. Multiple touch points to the end consumer is going to be a long term boost.
* With vaccine distribution, they have expanded the database of customer information.
* CVS became a omni-channel health service provider through 2020. Multiple touch points to the end consumer is going to be a long term boost.
Risks :
* Government could regulate PBMs and Health Insurance companies causing reduced profitability.
* $AMZN could eat CVS Pharmacy's and Caremark's lunch.
* Government could regulate PBMs and Health Insurance companies causing reduced profitability.
* $AMZN could eat CVS Pharmacy's and Caremark's lunch.
2021 Guidance : https://twitter.com/retaox/status/1362185966841188355?s=20
Valuation and expected returns : https://twitter.com/retaox/status/1362210373600952320?s=20
Base case :
* There's a reason CVS is cheap. It's because of the fears with e-commerce and regulations. Let's try to put numbers on them.
* Let's say one of their 3 segments got squeezed and no longer is profitable. If 1/3rd of the FCF is gone that leaves $6B in FCF.
* There's a reason CVS is cheap. It's because of the fears with e-commerce and regulations. Let's try to put numbers on them.
* Let's say one of their 3 segments got squeezed and no longer is profitable. If 1/3rd of the FCF is gone that leaves $6B in FCF.
* Yeah, they won't be able pay dividends for a while, but at-least they will be to service their debts comfortably.
* That brings FCF/P yield to 6%. Add real GDP growth to it, we get 9% IRR for a long term owner.
* That brings FCF/P yield to 6%. Add real GDP growth to it, we get 9% IRR for a long term owner.
Other useful resources :
* @BlueToothDDS : https://twitter.com/BlueToothDDS/status/1151505293295181825?s=20
* @Life21Good : https://twitter.com/Life21Good/status/1366256972203352064?s=20
* @Post_Market : https://twitter.com/search?q=(from%3Apost_market)%20%24CVS&src=typed_query&f=live
*
* https://www.toptal.com/finance/mergers-and-acquisitions/cvs-aetna
* @BlueToothDDS : https://twitter.com/BlueToothDDS/status/1151505293295181825?s=20
* @Life21Good : https://twitter.com/Life21Good/status/1366256972203352064?s=20
* @Post_Market : https://twitter.com/search?q=(from%3Apost_market)%20%24CVS&src=typed_query&f=live
*
* https://www.toptal.com/finance/mergers-and-acquisitions/cvs-aetna
Bull case :
* If none of the market fears materialize and the synergies actually get executed properly, they may achieve the promised 10% to 12% growth till 2030.
That's 20% IRR right there. But I'm not counting the eggs just yet.
* If none of the market fears materialize and the synergies actually get executed properly, they may achieve the promised 10% to 12% growth till 2030.
That's 20% IRR right there. But I'm not counting the eggs just yet.
Nothing makes me more happy that the CEO (then) laying out the bull case explicitly. https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5tZWdhcGhvbmUuZm0vaG93bGVhZGVyc2xlYWQ/episode/N2RjY2Y1NTYtZWM2ZC0xMWVhLThhYWEtYmIxMzZkMTY3NmI1?ep=14
