Overall, the performance of CVS stock with respect to the index has been quite volatile. Returns for the stock were 55% in 2021, -8% in 2022, and -13% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that CVS underperformed the S&P in 2023.
CVS Health made another big deal that has helped it grow its business significantly. Completed in 2018, the $70 billion acquisition of Aetna by CVS has provided a major boost to CVS's business. The combination has provided consumers with a more integrated experience, reduced costs, and improved access to healthcare. This will combine CVS's dense local presence through pharmacies and clinics with Aetna's health care benefits and services.
CVS's PBM business has gotten greater negotiating power with drug companies. The company has tapped into Aetna's 40 million user base and provides them with its other offerings, which include pharmacy benefit management.
In March 2023, CVS completed its planned acquisition of Signify Health, a home healthcare services provider, in an $8 billion deal. In May 2023, it acquired Oak Street Health for $10.6 billion.
Health Services
Health Services EBITDA Margin: We currently forecast CVS Health's EBITDA margin for Health Services to rise from 4.9% in 2023 to 5.4% by the end of our review period. There could be a 25% upside to the Trefis price estimate if margins improve to 8% by the end of our forecast period.
Health Care Benefits
Health Care Benefits EBITDA Margin: We currently forecast EBITDA margins for Health Care Benefits to rise from 7.6% in 2023 to about 7.9% by the end of our review period. There could be an upside of over 20% to the Trefis price estimate if margins were to increase to over 10% over our review period. On the other hand, there will be a similar downside if margins come under pressure due to the acquisition of new contracts and other contract renewals.
CVS Health (NYSE: CVS) is the largest pharmacy services provider in the US, comprising the largest network of retail pharmacy stores nationwide along with pharmacy services such as mail-order pharmacy services, prescription plan management, and claims processing. CVS fills and manages over 2 billion prescriptions per year through its businesses.
Currently, CVS operates over 7,500 Pharmacy stores. The retail business provides health care services through more than 1,000 retail health clinics, which are mostly located inside CVS pharmacies and serve to diagnose and treat minor health issues. The retail pharmacy business also includes an online pharmacy, CVS.com.
CVS retail stores sell prescription drugs and a wide assortment of general merchandise, including over-the-counter (OTC) drugs, beauty products, cosmetics, photo finishing, seasonal merchandise, greeting cards, and convenience foods.
As a pharmacy benefits manager, CVS Health manages the dispensing of pharmaceuticals through its fully automated mail-order pharmacies and national network of approximately thousands of retail pharmacies to eligible members in the benefit plans maintained by its clients. It utilizes proprietary information systems to perform safety checks, drug interaction screenings, and brand-to-generic substitutions.
An aging population combined with the fact that older people contribute to a larger proportion of expenditures on drugs will lead to an increase in the prescription drugs market size.
Looking at demographics, the number of people in the United States who are 65 or older was roughly 62 million in 2023 and the figure is expected to grow to 80 million in 2040. This age group fills an average with more than 25 prescriptions per person annually, 30% more than people between the ages of 55 and 64. That will increase utilization dramatically for years to come and will help drive the growth of both — PBM and retail businesses.
Generic drugs offer a higher gross margin compared to branded drugs. The total generic dispensing rate, which factors the percentage of generic drugs in a consumer's prescription, grew to around 88% in 2023, compared to 81% ten years ago. Generic drugs continue to replace branded drugs, albeit at a slower pace. With the expansion of generic drug sales in the U.S. (even if the pace is expected to slow down), the company may have room for growth in EBIT margins.
Private labels have grown increasingly popular among US consumers, as they offer the same quality as established brands and are priced lower. This offers customers value while providing CVS with significantly higher margins.
