Over the past couple of years there has been a trend in retail pharmacies gravitating toward a core model that provides healthcare services as well as retail pharmacy. This was recently exhibited by Walgreens Boots Alliance's move to invest $1 billion over four years in order to build out co-located pharmacy-clinics. Prior to that we saw CVS Health (CVS 0.50%) acquire Aetna, which has long been known for its medical healthcare management through its insurance services.
During the announcement of its Aetna acquisition, CVS was moving closer to its goal as a self-proclaimed premier health innovation company. Now, as the company continues to expand, it is finding patients and prescriptions basically being handed to it by a competitor. But can this turn into a boost for the company's bottom line?
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The good and bad
In early July Intermountain Healthcare, of Nevada, announced it would shutter the doors to 25 retail pharmacy locations. The good news for the patients of Intermountain is that the prescriptions and medical information would be transferred to the local CVS Health pharmacy, expected to take place in August of this year. The good news for CVS is that it provides a new set of customers and patients, which in turn will add to additional unanticipated, albeit localized, revenue.
The transition of new customers providing a boost to the bottom line for CVS is not likely to happen as a direct result of these 25 locations. They are low-volume retail pharmacies in Utah, as described by the Salt Lake City Health System.
The bad news for patients is also that the prescriptions and medical information of the patients would be handed to CVS. Why is that good and bad you ask? Earlier this year CVS experienced a data breach that left 1 billion data records unprotected online. This information included user IDs, medical search information, and email addresses. Fortunately, the company claims that no harm came to its customers or customer data. But this might certainly give caution to new customers and patients who may find their way into CVS from Intermountain.
The move by Intermountain could signify a small step toward a larger action to take place over the next few years. As companies change strategies in the wake of the COVID-19 pandemic, experts see consolidation taking place in the form of mergers and acquisitions across healthcare companies. Those that could not withstand the financial blows of the pandemic will ultimately be gobbled up by larger players.
In addition to moves such as Walgreens teaming up with VillageMD to build out one-stop pharmacy-clinic shops, and the entrenched MinuteClinics of CVS, we also see hospitals making moves to embrace in-house pharmacies. According to Drug Channels Institute, 26% of hospitals owned a specialty pharmacy in 2019, compared with 20% in 2018 and less than 9% in 2015. In larger hospitals -- those with 600 hospital beds -- that number skyrockets to 89% with in-house specialty pharmacy.
The bottom line
CVS is the clear leader among retail pharmacies with 24.8% of the prescription drug market share in 2020, while Walgreens is not far behind at 19%. As consolidation continues it could be expected that more scenarios like the one involving Intermountain and CVS might take place, where pharmacy chains that include healthcare services could pick up new customers and prescriptions from those looking to close retail locations. Utah may just be the start of bigger things to come. For now, I don't see a low-volume set of pharmacies providing enough to the bottom line in order for investors to get extra excited.
But for long-term investors keeping an eye on the healthcare market, and retail pharmacy in particular, CVS is coming off of an excellent first quarter in which it increased revenue on a year-over-year basis by 3.5% while providing investors an earnings-per-share increase of 6.8% year over year for the quarter. Looking toward the remainder of 2021, the company provided 2% raised guidance for full-year earnings per share of $7.62 at the midpoint of the range.
Based on that revised guidance, and a current stock price ($81) sitting at a 17% discount to the average analyst price target of $95, that could give investors something to get excited about.
