Streamlined Authorizations And Novo Nordisk Partnership Will Improve Efficiency

Key Takeaways

• Streamlining prior authorization and partnerships like Novo Nordisk may enhance customer satisfaction and boost revenue through efficient operations and increased prescription volumes.
  
• Exiting underperforming businesses and adopting transparent pricing might stabilize margins and improve profitability through operational improvements and digital engagement.
  
• Legislative changes, market exits, and rising costs threaten CVS's revenue and profitability amid competitive and regulatory challenges.

Catalysts

Provides health solutions in the United States.

• CVS Health is planning to simplify and streamline the prior authorization process, including bundling multiple requests into one. This initiative is expected to expedite treatments and reduce administrative costs, potentially improving revenue and net margins by enhancing customer satisfaction and operational efficiency.
  
• The company's partnership with Novo Nordisk to offer a more affordable price for Wegovy while integrating it with CVS’s weight management program could lead to increased revenue through higher prescription volumes and enhanced attractiveness to plan sponsors, thereby improving net margins.
  
• The shift to a transparent pricing model in retail pharmacy is expected to stabilize and make margins more predictable, potentially increasing customer retention and profitability, which could favorably impact earnings.
  
• With CVS’s decision to exit the individual exchange business due to continued underperformance, the company is projected to save $350 million to $400 million in losses, which should positively affect net margins and earnings.
  
• The expanded use of digital tools in CVS Health’s operations, like AI-powered recommendations and expanded app functionalities, aims to improve health outcomes and boost customer engagement, potentially driving higher revenues and better medication adherence, which can improve net margins through enhanced operational efficiency.

CVS Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CVS Health's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.0% in 3 years time.
• Analysts expect earnings to reach $8.5 billion (and earnings per share of $6.63) by about May 2028, up from $5.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.88%, as per the Simply Wall St company report.

CVS Health Future Earnings Per Share Growth

Risks

• Legislative changes, such as the policy enacted in Arkansas, could limit CVS's pharmacy operations, decreasing accessibility and potentially raising costs for consumers, which could negatively impact revenue and profitability.
  
• CVS's decision to exit the individual ACA exchange business by 2026 due to ongoing financial losses shows an inability to compete effectively in this market, potentially leading to decreased revenue streams.
  
• Continued elevated trends in Medicare group and individual product lines, especially inpatient expenditures, signal potential cost pressures that could reduce profit margins.
  
• Persistently high specialty medical pharmacy costs in Medicare and the potential tariffs impacting the pharmaceutical supply chain may exert upward pressure on costs, potentially impacting net margins.
  
• CVS's competitive position might be challenged by shifts in consumer sentiment towards vaccines and potential tariff impacts on front-store goods, which could affect sales and revenue.

Valuation

• The analysts have a consensus price target of $78.606 for CVS Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $70.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $435.1 billion, earnings will come to $8.5 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $66.23, the analyst price target of $78.61 is 15.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.