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General Category => Investment Ideas => Topic started by: kc3 on March 12, 2016, 10:58:29 PM

Title: CVS - CVS Health Corporation
Post by: kc3 on March 12, 2016, 10:58:29 PM
I'm still very new to this and haven't had much time to go through the financials heavily however I've noticed that CVS has shown consistent growth over the past ten years as well as increased profit as well as operating expenses that really aren't bad. One thing that does concern me is the cost of revenues but I don't know enough about this. The price/book is at 2.94 and the P/E is 21 which together might be a little high but again I'm fairly new to reading financials. Is there any thoughts? I plan on reading through the latest 10-K and 10-Q and a few other reports when I have some time as well.
Title: Re: CVS - CVS Health Corporation
Post by: rishig on March 13, 2016, 10:09:35 AM
I'm still very new to this and haven't had much time to go through the financials heavily however I've noticed that CVS has shown consistent growth over the past ten years as well as increased profit as well as operating expenses that really aren't bad. One thing that does concern me is the cost of revenues but I don't know enough about this. The price/book is at 2.94 and the P/E is 21 which together might be a little high but again I'm fairly new to reading financials. Is there any thoughts? I plan on reading through the latest 10-K and 10-Q and a few other reports when I have some time as well.

I owned CVS in the past (in 2011 when it was ~30) and sold it as it ran up. Here is my report from back in 2011. A lot has probably changed and I have not kept up, but you may find the report useful to get background on the industry: https://app.box.com/shared/y3aiym3q14
Title: Re: CVS - CVS Health Corporation
Post by: kc3 on March 13, 2016, 02:28:34 PM
Sweet, I appreciate that, thank you. I'm also looking into their competitors.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 28, 2016, 05:57:54 PM
CVS is down 20% since May. Does anyone have a good short thesis at this price?
Title: Re: CVS - CVS Health Corporation
Post by: kab60 on October 29, 2016, 12:45:39 AM
Nothing solid, but I think people are concerned that PBM's will be targeted politically. It seems there are some perverse incentives with both pharma, PBM's and insurance companies all being interested in rising list prices.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 29, 2016, 01:13:16 AM
I own NVO (bought more yesterday on the drop) & BBH & XBI & was thinking about something to inverse correlate risk of falling drug prices.

CVS still seems a bit pricey & I just can't get comfortable with Express Scripts smarmy management or Athena's either.

Seems like anything in this space would be a leap of faith...
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 29, 2016, 11:30:25 AM
Nothing solid, but I think people are concerned that PBM's will be targeted politically. It seems there are some perverse incentives with both pharma, PBM's and insurance companies all being interested in rising list prices.

Yes, I'm assuming that's the reason for this weakness. Plus, Clinton's election promises. Plus, general sell-off in health-care. Plus, smaller drug price increases.

But these are all perception, which I think is creating the opportunity.

Are there any fundamental issues I am missing?

--
I agree that the entire pharma/PBM/insurance industry is a cesspool. But I'm doubtful that the next president will get any meaningful reform given the sad state of the U.S. political process.

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 29, 2016, 10:55:39 PM
Nothing solid, but I think people are concerned that PBM's will be targeted politically. It seems there are some perverse incentives with both pharma, PBM's and insurance companies all being interested in rising list prices.

Yes, I'm assuming that's the reason for this weakness. Plus, Clinton's election promises. Plus, general sell-off in health-care. Plus, smaller drug price increases.

But these are all perception, which I think is creating the opportunity.

Are there any fundamental issues I am missing?

--
I agree that the entire pharma/PBM/insurance industry is a cesspool. But I'm doubtful that the next president will get any meaningful reform given the sad state of the U.S. political process.

I thought the PBM's/insurers were supposed to help reduce prices & improve outcomes?

There goes my theory about reducing the risk of lower margins in biopharma with a corrolary (whew; didn't wanna own one of those anyway...)
Title: Re: CVS - CVS Health Corporation
Post by: kab60 on October 29, 2016, 11:24:13 PM
Nothing solid, but I think people are concerned that PBM's will be targeted politically. It seems there are some perverse incentives with both pharma, PBM's and insurance companies all being interested in rising list prices.

Yes, I'm assuming that's the reason for this weakness. Plus, Clinton's election promises. Plus, general sell-off in health-care. Plus, smaller drug price increases.

But these are all perception, which I think is creating the opportunity.

Are there any fundamental issues I am missing?

--
I agree that the entire pharma/PBM/insurance industry is a cesspool. But I'm doubtful that the next president will get any meaningful reform given the sad state of the U.S. political process.

I thought the PBM's/insurers were supposed to help reduce prices & improve outcomes?

There goes my theory about reducing the risk of lower margins in biopharma with a corrolary (whew; didn't wanna own one of those anyway...)
I think that was the idea...

PBM's negotiate rebates on list prices of medicine and apparently pocket a bit of the rebate themselves, so it seems pharma and PBM has figured higher prices is good for both of them. Cause higher list prices = higher rebates. And insurance companies pass on the bill, so if margins stay the same, and the bill grows, their earnings increase. That's roughly how I've had it explained by industry source, but please correct me if I'm wrong.

The losers are obviously patients and employers. I think it's a crazy system but there's a lot of money that wants it to stay this way, so I wouldn't expect it to change (but I do hope it does for my fellow US boardmembers).
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 30, 2016, 12:46:01 AM
Nothing solid, but I think people are concerned that PBM's will be targeted politically. It seems there are some perverse incentives with both pharma, PBM's and insurance companies all being interested in rising list prices.

Yes, I'm assuming that's the reason for this weakness. Plus, Clinton's election promises. Plus, general sell-off in health-care. Plus, smaller drug price increases.

But these are all perception, which I think is creating the opportunity.

Are there any fundamental issues I am missing?

--
I agree that the entire pharma/PBM/insurance industry is a cesspool. But I'm doubtful that the next president will get any meaningful reform given the sad state of the U.S. political process.

I thought the PBM's/insurers were supposed to help reduce prices & improve outcomes?

There goes my theory about reducing the risk of lower margins in biopharma with a corrolary (whew; didn't wanna own one of those anyway...)
I think that was the idea...

PBM's negotiate rebates on list prices of medicine and apparently pocket a bit of the rebate themselves, so it seems pharma and PBM has figured higher prices is good for both of them. Cause higher list prices = higher rebates. And insurance companies pass on the bill, so if margins stay the same, and the bill grows, their earnings increase. That's roughly how I've had it explained by industry source, but please correct me if I'm wrong.

The losers are obviously patients and employers. I think it's a crazy system but there's a lot of money that wants it to stay this way, so I wouldn't expect it to change (but I do hope it does for my fellow US boardmembers).

I never could understand why insurers outsourced the PBM operation.

Seems like the goal of reducing prices would be better achieved by keeping it in house (and they could probably improve their margins a point or 2 to boot.)

If Athena was allowed to buy Cigna & was then able to do its own PBM in house, do you think the outcome would be good for pricing? (I'm positive it'd be bad for ESRX & it seems the government is in ESRX's corner on this one which indicates to me that the government has no interest in lowering prices...)

There may be a bit of fuzzy logic in my last statement.
Title: Re: CVS - CVS Health Corporation
Post by: fisch777 on October 31, 2016, 12:54:21 PM
My impression is that MCOs originally "carved out" the drug benefit itself from the rest of the main medical plan, as the Rx benefit used to be simply lumped in.  At first, the "carved out" benefit was basically just processing drug claims, which could be done more efficiently/broadly with PBMs, who built networks to process claims at drug stores on behalf of MCO payors.  As Rx claims grew, the pharmacy benefit significantly gained in complexity, and the role of PBMs grew.  As PBMs grew in size, the role expanded beyond a 3rd party processor and they began to leverage their buying power to obtain lower drug pricing, which helped their payor clients (employers, MCOs). 

Some PBM activities do appear to be in potential conflict of end patient and/or payor, but PBMs do take cost out of the entire supply chain, so I don't get the argument that they don't add value and shouldn't exist. It is clearly not simple or easy to negotiate with the scale and expertise that these big PBMs operate.  As recently as 2009, Wellpoint (now Anthem) sold NextRx to ESRX for ~$5B.

Why is the integrated Rx/PBM model (CVS/Caremark) superior to the standalone (ESRX, recently Catamaran) model?
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 31, 2016, 11:09:44 PM
My impression is that MCOs originally "carved out" the drug benefit itself from the rest of the main medical plan, as the Rx benefit used to be simply lumped in.  At first, the "carved out" benefit was basically just processing drug claims, which could be done more efficiently/broadly with PBMs, who built networks to process claims at drug stores on behalf of MCO payors.  As Rx claims grew, the pharmacy benefit significantly gained in complexity, and the role of PBMs grew.  As PBMs grew in size, the role expanded beyond a 3rd party processor and they began to leverage their buying power to obtain lower drug pricing, which helped their payor clients (employers, MCOs). 

Some PBM activities do appear to be in potential conflict of end patient and/or payor, but PBMs do take cost out of the entire supply chain, so I don't get the argument that they don't add value and shouldn't exist. It is clearly not simple or easy to negotiate with the scale and expertise that these big PBMs operate.  As recently as 2009, Wellpoint (now Anthem) sold NextRx to ESRX for ~$5B.

Why is the integrated Rx/PBM model (CVS/Caremark) superior to the standalone (ESRX, recently Catamaran) model?

Thanks - I didn't realize the history of the PBM (seems like they created a bunch if Frankensteins that got free & ate each other up & now the creators are gobbling up the resultant bigger monsters.)

I totally missed the United Health / Catamaran deal (did it go through & did they rename it Optum?)

I'm no expert but it seems logical that having PBM in house would be beneficial (albeit not for a pharma manufacturer as Merck found out.)

ESRX stands alone (will they eat their maker or be consumed & if so by whom?)
Title: Re: CVS - CVS Health Corporation
Post by: ABM on November 01, 2016, 12:42:01 PM


Why is the integrated Rx/PBM model (CVS/Caremark) superior to the standalone (ESRX, recently Catamaran) model?

I am spending a lot of time thinking about this myself. My best guess is that a scaled PBM returns profile is more attractive than the pharmacy business. It is a asset light negative cash conversion cycle business that has very high returns on tangible net assets.  This may explains why CVS entered the vertical which could have also been considered a low cost source of financing for its retail business inventory. I mean the amount of working capital ESRX has released over the past 10 years while growing EBITDA at high teens is astonishing and will be remembered in the same vein as AZO. 

Now from the perspective of ESRX, it is more difficult to understand rational incentives.  On the one hand, independent scaled PBM sounds ideal as it can serve multiple customers reinforcing network effect and widening its moat as the low cost producer.  On the other hand, disintermediation remains a threat as pharmaceuticals increase adoption rates of using direct to consumer rebates or "coupons" as they are known.  This is apparently a fast growing but real threat that could one day displace the PBM function as we know it.  So you can see ESRX maybe wanting to partner with a scaled payor to ensure its business remains relevant and well funded to face the shifting challenges of the industry.

To the comment earlier about why insurers let the PBMs out of the box to begin with, I believe it was due to the industry structure at the time which was fragmented; as such, a scaled PBM made sense for the benefit of all MCOs.  Now with the consolidated/consolidating MCO industry it likely makes less sense to outsource the PBM function if you underwrite 20% of all scrips int he country like UNH. 
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 01, 2016, 08:55:59 PM


Why is the integrated Rx/PBM model (CVS/Caremark) superior to the standalone (ESRX, recently Catamaran) model?

I am spending a lot of time thinking about this myself. My best guess is that a scaled PBM returns profile is more attractive than the pharmacy business. It is a asset light negative cash conversion cycle business that has very high returns on tangible net assets.  This may explains why CVS entered the vertical which could have also been considered a low cost source of financing for its retail business inventory. I mean the amount of working capital ESRX has released over the past 10 years while growing EBITDA at high teens is astonishing and will be remembered in the same vein as AZO. 

Now from the perspective of ESRX, it is more difficult to understand rational incentives.  On the one hand, independent scaled PBM sounds ideal as it can serve multiple customers reinforcing network effect and widening its moat as the low cost producer.  On the other hand, disintermediation remains a threat as pharmaceuticals increase adoption rates of using direct to consumer rebates or "coupons" as they are known.  This is apparently a fast growing but real threat that could one day displace the PBM function as we know it.  So you can see ESRX maybe wanting to partner with a scaled payor to ensure its business remains relevant and well funded to face the shifting challenges of the industry.

To the comment earlier about why insurers let the PBMs out of the box to begin with, I believe it was due to the industry structure at the time which was fragmented; as such, a scaled PBM made sense for the benefit of all MCOs.  Now with the consolidated/consolidating MCO industry it likely makes less sense to outsource the PBM function if you underwrite 20% of all scrips int he country like UNH.

Nice thought process!

I'm looking into this because I own NVO, BBH & XBI & I'd like to have something that will counterbalance the risk of lower drug prices.

I like CVS but it seems a bit expensive & I don't like (but don't hate) ESRX & it seems cheap (lots of overhang from potential loss of Anthem contract & the proposed Cigna/Anthem merger, competition from UNH & CVS & the point you raised about possible future irrelevance of ESRX in the whole process...)
Title: Re: CVS - CVS Health Corporation
Post by: ABM on November 02, 2016, 06:47:19 PM
Further to my comment above, I found this excerpt from a buyside long report for ESRX posted on Sumzero defending the independent PBM argument

"There is in my mind a rational argument that the PBM business should remain independent of the HMO or the Retail pharmacy businesses because their interests are not necessarily aligned. By way of example, it seems to me inconceivable that Anthem would offer their PBM contract to UnitedHealth Ė there largest competitor. Similarly it seems likely that Walgreens would be more predisposed to dealing with Optum (Untied Health) or Express Scripts Ė as opposed to CVS (their largest competitor. To this extent and going forward, it seems reasonable that ESRX and United/Optum should have the upper hand over CVS/Caremark, when negotiating with pharmacies such as Walgreen, Target, Walmart, etc. Similarly ESRX and CVS/Caremark should have the upper hand over United/Optum when negotiating with HMOís such as Anthem."
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 08, 2016, 06:37:33 AM
Down 15% today.

http://www.bloomberg.com/news/articles/2016-11-08/cvs-says-slowing-prescriptions-will-hurt-profits-next-year

Quote
CVS Health Corp. earnings forecasts for 2016 and 2017 came in below analystsí estimates as more prescriptions are being filled outside of its drugstores, sending the shares plunging Tuesday.
Title: Re: CVS - CVS Health Corporation
Post by: fisch777 on November 08, 2016, 11:23:56 AM
Appears that most of the issues plaguing CVS today trace back to the PBM having superior leverage in the Rx supply chain, which allows PBM and respective client to steer lives away from specific retail pharmacy networks as it sees fit, to control payor costs.  The same thing happened in 2012 (on an ever larger scale) with ESRX dropping WAG from its network.

Again, I ask why is the integrated Rx/PBM model better?
Title: Re: CVS - CVS Health Corporation
Post by: rogermunibond on November 08, 2016, 11:55:39 AM
When it was about choice and consumer convenience having retail/PBM made sense.  When it's about cost reduction, well then...  that argument vaporizes.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 08, 2016, 08:55:08 PM
Appears that most of the issues plaguing CVS today trace back to the PBM having superior leverage in the Rx supply chain, which allows PBM and respective client to steer lives away from specific retail pharmacy networks as it sees fit, to control payor costs.  The same thing happened in 2012 (on an ever larger scale) with ESRX dropping WAG from its network.

Again, I ask why is the integrated Rx/PBM model better?

Good point...

If ESRX manages to stay independent, how do you think it will affect the competitve dynamic if at all?

Will politicos continue grinding at pharmas or payers or both?
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 28, 2016, 07:28:47 AM
CVS is down 33% form all-time highs. It is now trading at under 12x FCF. This is remarkable for such a steady growth company when markets are at all time highs.

Ignoring the general malaise around drug prices and PBM business models, here is my theory.

--
There is an epic battle brewing between Walgreen's and CVS.

CVS owns a PBM, pharmacy, clinics, specialty pharmacy, etc. Ultimately, it is hoping that this integrated approach allows it to offer cheaper and better PBM services to payers (employers, insurance companies, government). CVS is also using the PBM to drive traffic to the retail stores. As part of this strategy, CVS is de-emphasizing general merchandise sales. Ending sales of cigarettes, for example. In recent years, this strategy is winning. CVS was winning market share at both pharmacy and PBM.

Walgreen's is following a very different strategy. It is using prescription sales to drive traffic to stores, where it hopes to sell very high margin beauty products. Because the goal is to drive traffic, it is willing to sacrifice pharmacy margin to become the "preferred network" for PBMs and payers. Basically, Walgreens offers discounts on drugs and payers steer traffic to Walgreens beauty products.

CVS and Walgreen's retail stores are both heavyweights. CVS is slightly larger. But with Walgreen's acquisition of Rite Aid, they are basically the same size with excellent coverage across the U.S. Normally, you would expect CVS to respond aggressively to win its own share of "preferred networks". The negative impact on margins would encourage the duopoly to compete less vigorously.

But the brilliant owner of Walgreen's is playing some mean judo. Because PBMs compete with CVS Caremark, they are unlikely to select CVS as a preferred network. So CVS is unable to compete for a large chunk of business. Walgreen's can move aggressively knowing that CVS can't retaliate.

Pharmacies have high fixed costs. Any loss of market share has a big impact due to this operating leverage. In the past few years, CVS has been gaining share but now the tides are turning. Even relatively modest share losses could be a big hit to earnings.

--
To respond, CVS is hoping to use its integrated model to win even higher share of the PBM business. So there is an interesting dynamic here. CVS retail will lose share of scripts from 3rd party PBMs. But win more share in the PBM business. The PBM business is a better business, so CVS might still grow despite headwinds in the retail business.

--
This is an epic showdown worthy of an HBS case study.

It is really hard to predict how this battle shakes out. I'm using LEAPs to buy CVS. If CVS can stabilize its retail business, it is worth much more than 12x FCF. But there is also a risk that hyper-competition from Walgreen's could decimate FCF. (There are also regulatory risks that make the protective features of the LEAPs attractive).

--
Some articles discussing these dynamics:
http://www.drugchannels.net/2015/04/walgreens-boots-alliance-analysis-of.html
http://www.drugchannels.net/2016/10/walgreens-tricare-win-tracking-wbas.html
http://www.chaindrugreview.com/brindley-walgreens-is-reinventing-beauty/
Title: Re: CVS - CVS Health Corporation
Post by: fisch777 on November 28, 2016, 08:10:53 AM
As an anecdote, I just got letter from my PBM (Prime via BCBS) stating that I can no longer use the CVS I've been using for 6 years and must switch all Rx to a "preferred" pharmacy (i.e., in network), which includes a tiny neighborhood pharmacy (zero scale/negotiating power) and, you guessed it, Walgreens.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 29, 2016, 10:05:11 AM
CVS returns fire:
http://www.unitedhealthgroup.com/Newsroom/Articles/Feed/Optum/2016/1129CVSPharmacy.aspx

Looks like this allows OptumRX patients to get their 90-day prescriptions filled at CVS retail pharmacies. On the one hand, this looks to negate the advantage that WBA gained in its own deal with OptumRX. On the other hand, it negates slightly the advantage that CVS Caremark has with it's Maintenance Choice program.

Interesting times...

H/T @bluegrasscap
Title: Re: CVS - CVS Health Corporation
Post by: ABM on November 29, 2016, 10:42:27 PM
Good points KC. 

I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy. 

CVS in their most recent Q discloses this trend in a muddled way but it is there.  Payors/PBMs are after the spread the retailers earn on the drugs dispensed, especially on generic, which if this catches steam it could be a big challenge for CVS & WBA. 


As MCOs & PBMs have scaled, in the face of runaway growth in drug spend, they are increasingly searching for innovative ways to minimize spend.  We all know about the rise in mail prescription fills that has been successful in recent years.   ESRX is now filling 28% of all scrips by mail.  This bypasses the pharmacy channel and lowers overall costs in the transaction chain for payors and consumers .  Curiously, CVS's Caremark, only fills 18% of its scrips through the mail despite rivaling ESRX in scale. 

There is also the movement to the "90 day" fill but of course even though it is good for Caremark is is bad for CVS retail as it reduces foot traffic that is critical to support the "front store" retail.  The inherent conflict of interests are growing and their counterparts including competitors and customers know this.

Given the scaled customer concentration and bargaining advantage this delivers, WBA may realize that it is futile to resist this trend and is proactively ceding margin to secure exclusive access to these networks which will provide guaranteed traffic levels to its front store operations.  In other words, being a first mover hoping to reap the benefits while CVS is tied up trying to figure out how they can optimize the relationship between their PBM & retail operations to better appease customers.  I do not expect Caremark  to lobby on behalf of clients to follow the emerging trend as it may prove catastrophic for the CVS retail side.  I am aware of the ABC/WBA tieup and this will not happen over night night but it is important to note that ABC is the largest specialty distributor in the game and the supply chain operates largely outside the traditional channels. 

I haven't even touched specialty which we can leave for the next post but there is one more thing worth mentioning.

There is increasing activity by payors/PBMs to buy direct from producers.  This has the potential to disrupt the wholesaler business as they are forced to accept another fee-for-service arrangement.  Put simply, the PBM will buy the drug from Pfizer pay CAH to deliver it to the pharmacy where the pBM will pay the pharmacy a dispensing fee for the service. 

This is not mumbo jumbo as I have heard as much from some of the big players in the ecosystem and they are all trying to protect their profit pool but it is hard when you are up against the Goliaths of the world and battling on a sinking ships of sorts. 

MCK went through this transition in the mid 2000's (on its own volition) after a period flat to falling drug prices causing losses on inventory balances held.  At the time, they decided to shift to a fee-for-service model that while deliver lower overall margins required much less capital investment ultimately driving higher overall capital returns. Unfortunately, CVS has a ball & chain in the way of its brick & mortar retail business and so may not be as flexible as MCK was at the time. 

Btw, the Citi Analyst predicted much of this conundrum back in 2014 as detailed in the WBA initiation report.  Great primer on the retail sector.  I will post it if anyone's interested. 

Bonus read for those that want a helpful primer on pharma supply chain [url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf (http://[url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf)[/url]
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 30, 2016, 06:43:04 AM
I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy.

Thanks for the great details.

The interesting dynamic is that this needs the cooperation of either CVS or Walgreen's. I don't think any PBM can compete without at least one of the national chains.

Walgreen's needs the retail pharmacy margin. So from a Game Theory perspective, Walgreen's was unlikely to blink first.

CVS owns a major PBM so it can be agnostic to whether the profit goes to the PBM or the pharmacy. But it didn't have an incentive to move aggressively.

But with the new "Boots" beauty strategy, Walgreen's has a new strategic option. It can trade pharmacy profit for beauty profit. So the PBM's now have more leverage.

For CVS, the disaster scenario would be both lost market share and compressed margins. This happens if CVS is unable or unwilling to bid aggressively for preferred networks.

The likely outcome is that CVS will respond aggressively. Market share will stabilize and retail pharmacy margins will fall. In this scenario, Walgreen's makes up for lost margin with it's beauty products and CVS compensates with its PBM. The OptumRX deal suggests that CVS plans to fight back.

--
Some more background on the OptumRX deal (h/t @bluegrasscap)
http://www.drugchannels.net/2016/11/cvs-changes-direction-with-surprise.html?m=1
Title: Re: CVS - CVS Health Corporation
Post by: ABM on November 30, 2016, 07:47:33 AM
I think of WBA as a bit more aggressive in their strategy to play disruptor and may be willing to adapt full fee for service model while wagering that its front store business is strong enough to carry off the business in the US.  I believe CVS is telling us that any compression on retail margins or loss of customer traffic could have an outsized impact on retail segment as the pharmacy is a critical driver of store traffic that generates front store sales. 

On your point about profits just being shifted between segments, I would disagree to an extent as the return profiles are very different in the PBM business vs. the retail given the retails capital intensity. They need a certain level of margin output to support those capital dollars invested in working capital and fixed assets.  If they were to sacrifice margin dollars in lieu of producing them at the PBM I am not sure how positive that can be for overall company capital returns. 

Further, WBA is run by an owner operator with billions at stake while CVS CEO owns a neglible amount of stock. 

Did you guys see the near $200 million open market purchase by WBA CEO a couple of weeks back?

https://www.sec.gov/Archives/edgar/data/1618921/000155468716000006/xslF345X03/primary_doc.xml

I have followed and owned CVS for years but I am quickly becoming a fan of the man that runs WBA. 
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 30, 2016, 08:38:37 AM
Quote
I have followed and owned CVS for years but I am quickly becoming a fan of the man that runs WBA.

CVS is a cigar butt investment for me. But WBA is very intriguing too. Pessina is 74. Not as old as Buffett or John Malone but not ideal for a jockey bet.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 10, 2016, 04:25:57 AM
Good points KC. 

I have been hearing from some industry people that payors and by extension their PBMs may be pushing pharmacies to turn increasingly to the old fee-for-service revenue model rather than the prevailing mark up model.  The current structure is a mix between fee-for-service and a mark-up from the perspective of the pharmacy. 

CVS in their most recent Q discloses this trend in a muddled way but it is there.  Payors/PBMs are after the spread the retailers earn on the drugs dispensed, especially on generic, which if this catches steam it could be a big challenge for CVS & WBA. 


As MCOs & PBMs have scaled, in the face of runaway growth in drug spend, they are increasingly searching for innovative ways to minimize spend.  We all know about the rise in mail prescription fills that has been successful in recent years.   ESRX is now filling 28% of all scrips by mail.  This bypasses the pharmacy channel and lowers overall costs in the transaction chain for payors and consumers .  Curiously, CVS's Caremark, only fills 18% of its scrips through the mail despite rivaling ESRX in scale. 

There is also the movement to the "90 day" fill but of course even though it is good for Caremark is is bad for CVS retail as it reduces foot traffic that is critical to support the "front store" retail.  The inherent conflict of interests are growing and their counterparts including competitors and customers know this.

Given the scaled customer concentration and bargaining advantage this delivers, WBA may realize that it is futile to resist this trend and is proactively ceding margin to secure exclusive access to these networks which will provide guaranteed traffic levels to its front store operations.  In other words, being a first mover hoping to reap the benefits while CVS is tied up trying to figure out how they can optimize the relationship between their PBM & retail operations to better appease customers.  I do not expect Caremark  to lobby on behalf of clients to follow the emerging trend as it may prove catastrophic for the CVS retail side.  I am aware of the ABC/WBA tieup and this will not happen over night night but it is important to note that ABC is the largest specialty distributor in the game and the supply chain operates largely outside the traditional channels. 

I haven't even touched specialty which we can leave for the next post but there is one more thing worth mentioning.

There is increasing activity by payors/PBMs to buy direct from producers.  This has the potential to disrupt the wholesaler business as they are forced to accept another fee-for-service arrangement.  Put simply, the PBM will buy the drug from Pfizer pay CAH to deliver it to the pharmacy where the pBM will pay the pharmacy a dispensing fee for the service. 

This is not mumbo jumbo as I have heard as much from some of the big players in the ecosystem and they are all trying to protect their profit pool but it is hard when you are up against the Goliaths of the world and battling on a sinking ships of sorts. 

MCK went through this transition in the mid 2000's (on its own volition) after a period flat to falling drug prices causing losses on inventory balances held.  At the time, they decided to shift to a fee-for-service model that while deliver lower overall margins required much less capital investment ultimately driving higher overall capital returns. Unfortunately, CVS has a ball & chain in the way of its brick & mortar retail business and so may not be as flexible as MCK was at the time. 

Btw, the Citi Analyst predicted much of this conundrum back in 2014 as detailed in the WBA initiation report.  Great primer on the retail sector.  I will post it if anyone's interested. 

Bonus read for those that want a helpful primer on pharma supply chain [url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf][url]http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf (http://[url=http://www.americanhealthpolicy.org/Content/documents/resources/December%202015_AHPI%20Study_Understanding_the_Pharma_Black_Box.pdf)[/url]

Thanks for the link & the commentary.

Before I read this, I didn't really understand enough about PBM's & the other industry players/payers to confidently choose a company to invest in.

After reading, I understand well enough to know that there's too many moving parts (I'll stick to the upstream end...)

Pharma manufacturers fortunes may wax & wane but survivability seems more assured.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 11, 2017, 06:32:09 AM
CVS is no longer part of the Blue Cross Blue Shield preferred pharmacy network.

CVS will continue to accept Blue Cross Blue Shield Medicare Part D plans.

CVS says any customer who still has questions should bring their prescription card to their CVS for assistance.
Title: Re: CVS - CVS Health Corporation
Post by: ABM on January 28, 2017, 02:03:52 PM
Since my last post, I have learned that CVS is the largest plan provider/sponsor for LIS Medicare Part D enrollees.  These represent 30% of Part D members but about 66% of total Part D spending.  ESRX has a neglible level of Part D members as a plan sponsor. 

This is what the companies refer to as "direct" or when they are not acting as only the PBM.  They are taking some insurance risk on the revenue. 

I raise this point b/c it is becoming clear that the incentive structure for Part D, in its current form, benefits the MCOs/PBMs at the expense of Medicare and the individuals.  The increasing levels of rebates protect profits while simultaneously shifting more of the ultimate drug cost to the individuals and Medicare. 

It is complicated to explain the nuances but you can see Medpac report from June 2015 for more details. See link http://www.medpac.gov/-documents-/reports (http://www.medpac.gov/-documents-/reports)

Excerpt from 2015 Medpac report
"One commenter pointed out that the rebates sponsors receive from manufacturers for all brand-name drugs dispensed to enrollees who reach Part Dís catastrophic threshold (including rebates in the coverage gap phase) can more than offset plansí 15 percent share of payments for spending that exceeds the Part D catastrophic threshold. Thus, requiring plans to pay a share larger than 15 percent could provide greater incentive for sponsors to negotiate larger rebates with manufacturers or design formularies in ways that encourage greater use of lower cost drugs."

As Part D spends $73B/yr or ~25% of total US net drug spend using tax payer funds, I can see how any shenanigans by the suppliers (e.g. PBM/MCOs) will be leveraged and politicized by opponents to the existing model. 

There is no question that drug companies are raising gross/list prices to offset the higher rebates they must provide network customers (e.g. PBMs).  This allows them to recapture some revenue at the point-of-sale (e.g. retail pharmacy) from the individual as their co-payment/coinsurance is calculated based on the list price and not the net price received by the PBM/MCO.  Further compounding the matter is the shift to higher deductible plans in the commercial market that is forcing individuals to absorb more of this "gross pricing" increases at point-of-sale. 

This is how yesterday's WSJ report cites insulin shots costing Joe from wherever $400 last month and $600 this month in out-of-pocket expense at the pharmacy while at the same time PBMs are promoting drug inflation for their clients tracking the 3% level in 2016.  It is because the PBM only consider the plan spend by their customers and not total drug (which includes what the individuals pay out of pocket). 

Excerpt from Jan 2017 JPM Healthcare Conference
ESRX CEO
"Quite frankly, there is no question in my mind that the reason that our clients today have a 3.9% drug trend is because we exist and we have created that competition in classes where there are multiple agents that could take care of a patient and I'm not going to apologize for that and I know our industry is not going to apologize for that."

Excerpt from CVS investor day Dec 2016
CVS CEO
"One of the hallmarks of this value proposition, it lies in our ability to help clients more effectively manage their pharmacy spend, and we continue to deliver on this goal with our clients realizing only a 3.3% increase in their pharmacy spend through September of this year."

Title: Re: CVS - CVS Health Corporation
Post by: ABM on January 30, 2017, 05:23:45 PM
Lawsuit filed today against Lilly, Sanofi, and Novo for price collusion on insulin drugs and surprises they name PBM as accessories to the conspiracy but they are not defendants name in the lawsuit.  Worth the read for background on supply chain

https://static01.nyt.com/science/01-30-17_Insulin_Class_Action_Complaint_Hagens_Berman.PDF (https://static01.nyt.com/science/01-30-17_Insulin_Class_Action_Complaint_Hagens_Berman.PDF)
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 30, 2017, 07:21:24 PM
Lawsuit filed today against Lilly, Sanofi, and Novo for price collusion on insulin drugs and surprises they name PBM as accessories to the conspiracy but they are not defendants name in the lawsuit.  Worth the read for background on supply chain

https://static01.nyt.com/science/01-30-17_Insulin_Class_Action_Complaint_Hagens_Berman.PDF (https://static01.nyt.com/science/01-30-17_Insulin_Class_Action_Complaint_Hagens_Berman.PDF)

I'll be interested in the plaintiff's responses.

Wonder why the PBM's weren't named as plaintiff's?
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 02, 2017, 07:11:36 AM
Anyone have a copy of the Baird report downgrading CVS that they can share?

Title: Re: CVS - CVS Health Corporation
Post by: fareastwarriors on February 02, 2017, 09:17:35 AM
Anyone have a copy of the Baird report downgrading CVS that they can share?

Here you go. Please post your thoughts after you go through it. Thanks.
Title: Re: CVS - CVS Health Corporation
Post by: xtreeq on February 02, 2017, 09:26:59 AM
This is great, thanks
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 02, 2017, 12:26:14 PM
Here you go. Please post your thoughts after you go through it. Thanks.

First, kudos to the analyst for taking such a strong stand. I wish more analysts had backbone.
Second, analyst had an overweight/$114 target in April. Most of the change is due to lowering his terminal PE multiple from 15x to 10x. Sentiment has clearly soured.
Third, his model forecasts annualized 7% EPS growth over the next 5 years. So how does he justify current P/FCF of only 12x? He assumes PE multiple contraction to 10x by 2021. Oddly, he also ignores dividends in his FY21 P/E analysis, so I think his PT is an error.

In other words, he is fitting his valuation to his sentiment. Standard practice.

--
The key question he raises: what risk does DIR controversy pose to future FCF?

First, what is the likelihood that Congress, Executive, Courts, CMS, or market forces reign in DIR?
Second, even if this does occur, will it be material?
Third, even if it is material, will a positive surprise (e.g. corporate tax cuts) balance out negative surprises?

The answers to all of those questions seem unknowable. Clearly, sentiment against PBMs is very strong right now. But that has been true throughout history. But then again, with the current administration literally anything could happen. Including Trump expropriating CVS and turning it into a  chain of for-profit prisons.

Is the DIR narrative just a reflection of the current negative sentiment on PBMs? On a more optimistic day, I could argue that the excessive DIRs are a reflection of CVSs moat and market power.

--

How do we resolve this? I like Howard Marks framework -- we can't know where we are going but we can know where we stand. So where do we stand? There is clearly a sense of uncertainty and doom surrounding CVS. Seems like a good time to buy a wonderful, recession resistant business.

Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 02, 2017, 01:03:33 PM
Here is CVS' statement on DIR fees:
http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/reports/CVS%20Statement%20on%20DIR.pdf

And here is a whitepaper arguing the other side (note this is paid for by CVS opponents):
https://www.communityoncology.org/wp-content/uploads/2017/01/COA_White_Paper_on_DIR-Final.pdf

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 02, 2017, 01:14:15 PM
Here is CVS' statement on DIR fees:
http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/reports/CVS%20Statement%20on%20DIR.pdf

And here is a whitepaper arguing the other side (note this is paid for by CVS opponents):
https://www.communityoncology.org/wp-content/uploads/2017/01/COA_White_Paper_on_DIR-Final.pdf

Great find (I Googled like crazy trying to get that Frier Levitt paper!)
Title: Re: CVS - CVS Health Corporation
Post by: John Hjorth on February 04, 2017, 02:24:25 PM
Thanks for sharing your findings here, KCLarkin, i's much appreciated.

I have duly noted your comments about the origin of the Frier Lewit report. I have read the executive summary only so far, but I will read the report in full later, but soon.

Are the health care schemes involving public funds subject to audit?

The whole system, with the PBM's handling enormous amounts dollars, seems to me to be totally screwed by discounts, rebates and the likes, - to an extent, so that a price is no longer just a price.

I'm not trying to derail this topic a part from CVS, but I have attached a screen shot from the NVO 2015 Annual Report, containing gross-to-net sales reconciliations 2013 - 2015 [p. 64]. NVO is a mini in the pharma industry. The discounts etc. seems to me like cartoon figures.

- - - o 0 o - - -

Here, if a report like the Frier Lewitt report popped up in public, the Danish IRS would test the allegations separately on own initiative or on request, and in the end hand out a control report to whoever wanted to read it. If any material problems, somebody would be in real trouble.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 04, 2017, 03:49:23 PM
I have duly noted your comments about the origin of the Frier Lewit report. I have read the executive summary only so far, but I will read the report in full later, but soon.

If you read it, remember that it is written by lobbyists on one side. The PBM/Plan sponsors are lobbying form the other side. In other words, it is like reading only the plaintiffs legal brief.

It is clear that the US medical system creates some perverse behaviour and skewed incentives. But I didn't see anything egregious in the report. I'm not sure why the Baird analyst reacted so harshly.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 04, 2017, 04:51:49 PM
I have duly noted your comments about the origin of the Frier Lewit report. I have read the executive summary only so far, but I will read the report in full later, but soon.

If you read it, remember that it is written by lobbyists on one side. The PBM/Plan sponsors are lobbying form the other side. In other words, it is like reading only the plaintiffs legal brief.

It is clear that the US medical system creates some perverse behaviour and skewed incentives. But I didn't see anything egregious in the report. I'm not sure why the Baird analyst reacted so harshly.

Thanks for pointing that out.

My stake in Novo Nordisk & biotech ETF's has me biased towards where the blame should go.

I still believe that pharma manufacturers have better long term prospects than the downstream entities.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 07, 2017, 10:59:38 AM
The whole system, with the PBM's handling enormous amounts dollars, seems to me to be totally screwed by discounts, rebates and the likes, - to an extent, so that a price is no longer just a price.

The pharma companies are trying to deflect pricing scrutiny to the PBMs. There seems to be a growing consensus that PBMs are leaching excessive profits out of the system. But a quick sanity check shows this isn't true.

The entire CVS company, including the retail pharmacy, front-of-store sales, health clinics, PBM, and insurance operations only generated Net Income of $5.2 B in 2015. That's about 1% of US drug spending.

PBMs are not the cause of the price increases. PBMs are using their buying power to demand lower prices. Rather than sacrificing profits, the drug companies are jacking up list prices. It is remarkable how effectively the drug companies have scapegoated the PBMs.
Title: Re: CVS - CVS Health Corporation
Post by: John Hjorth on February 07, 2017, 11:31:06 AM
Thanks for your input here, KCLarkin,

I try to stay open minded about the whole US healtcare system as it is right now, because I do not have enough knowledge about it to make a judgement.

I will take a look at the four major PBMs in the weeks to come.

My post about the rebates, discounts etc. was meant to be read so to say straight out.
Title: Re: CVS - CVS Health Corporation
Post by: gjangal on February 08, 2017, 01:01:23 PM
The industry seems to be moving to a place where the PBM function is facing revenue pressure by either being folded into the payers ( Blue shield and prime therapeutics) or with the pharmacy ( CVS Caremark) . The drug wholesalers ( MCK, CAH, ABC) also have to rethink their model. Their revenues are under pressure with pharmacy players consolidating, drug warehousing also is becoming a part of the pharmacy function increasingly ( WBA and ABC)

WBA has made nice moves in this market compared to CVS. They moved to buy Rite aid, struck a deal with prime therapeutics for pharmacy benefits and bought stake in ABC to control warehousing. CVS also has a deal setup with CAH for generics.

Anthem's renewal with Express scripts ( around 14 mm members) may be in question as renewal come up. They might choose to go with prime therapeutics which is co-owned by all the bcbs plans. WBA stands to gain if they do this.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 08, 2017, 06:35:18 PM
Here is an example of the absurd scapegoating that Big Pharma is doing:
https://www.bloomberg.com/news/articles/2017-02-08/seeing-danger-of-trump-s-new-thing-health-group-preps-defense

Quote
The top executive at British drug giant GlaxoSmithKline Plc took a veiled swipe at the PBM industry on Wednesday, citing an industry-sponsored report that out of every $100 of a drugís list price, only two-thirds ends up back with the drugmaker.

Much of the rest goes to ďnon-innovators in a system which thinks itís paying high prices for innovation,Ē

--
Bob is shopping in a Mexican street market. He spots a beautiful pottery piggy bank. He decides to buy it for his son. "How much?" he asks. "1000 pesos," replies the seller. Bob walks away.

A little while later, he is drinking a Cerveza with his friend Pablo B Morales. He tells Pablo about the beautiful piggy bank. Pablo replies, "You need to haggle harder. Do you want me to go speak to the seller?".

Pablo goes back to the seller and haggles down the price to 500 pesos. Bob gives Pablo 50 pesos in gratitude.

Bob returns the next year. The seller is now selling piggy banks for 1500 pesos.  And tourists are complaining about the high price of piggy banks. The clever seller says, "you must understand. Only 1/2 of the list price ends up in my pocket. Much of the rest goes to non-innovators in the system."

--
List Price: 1000
Net Price: 500
P.B.M: 50

Who are the "non-innovators" who took the remaining 450 pesos?
Title: Re: CVS - CVS Health Corporation
Post by: giofranchi on February 09, 2017, 04:47:14 AM
Strong Q4 2016 results:
http://seekingalpha.com/news/3241986-cvs-q4-revenues-12-percent-earnings-14-percent-shares-2-percent-premarket

Selling for little more than 13x forward earnings, while still growing sales and earnings at a very healthy rate, CVS looks very interesting.

Can someone sum up the bear thesis?

Cheers,

Gio
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 09, 2017, 05:32:55 AM
Here is an example of the absurd scapegoating that Big Pharma is doing:
https://www.bloomberg.com/news/articles/2017-02-08/seeing-danger-of-trump-s-new-thing-health-group-preps-defense

"As part of PBMsí lobbying plan, they list $100 billion in government savings that could be proposed to Trump and Congress as a way to get drug costs down -- and deeply cut drug and biotech profits. That includes shortening the time during which drugmakers have exclusive sales rights on new treatments and raising taxes on the industry."


Anyone know what time frame the proposed $100B savings would extend over?

What this lobby calls "exclusive sales rights" are patents & they're there to allow pharma manufacturers who've spent $2B+ over a decade or more (not counting the $ on discontinued/failed projects) to actually recoup & turn a profit.

On that note; I submit that they should add an extra year to the "period of exclusivity" in exchange for lower gross margin introductions of branded products & price increases capped to inflation (admittedly difficult to legislate & monitor) & a requirement that the branded producer introduce a generic version 2 years before patent expiration to further allow them to earn a ROIC while lowering drug spend.

The industry should probably get proactive now, on the introduction of generics to its own products.

The last point I raise (in my carefully cherry picked paragraph from the article 😲) is in regards to the lobby's suggestion that taxes would be a solution (taxes, really?)

Express Scripts shows an 8.x% GM & 4.x% OM which doesn't seem egregious.

Pharmas post significantly higher GM's & OM's.

Who's taking the biggest risks with owners capital?

I'm OK with Novo Nordisk dropping prices to remain competitive but how much is enough?

How about some transparency in the rebates (a breakdown on every sales receipt showing list & net prices along with how much of the difference is charged to the patient IN BOLD.)

Heyyyyyy wait a minute - this administration campaigned against regulations.....
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 09, 2017, 06:32:01 AM
http://finance.yahoo.com/news/elephant-courtroom-federal-judge-said-141429369.html

I await the presidents Tweet with baited breath!

Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 17, 2017, 07:23:07 AM
More lobbying in the DIR battle:
https://naosp.wildapricot.org/resources/Pictures/NASP%20Response%20to%20PCMA%20Comments%20Regarding%20DIR%20Fees.pdf

But this seems to undermine their argument:

Quote
There is no cap on the dollar figure of the percentage fee applied in some DIR Fee programs, resulting in upwards to $1,000 per prescription being pulled back from the specialty pharmacy.

In other words, specialty pharmacies were earning up to $1000 per prescription just from the spread. No wonder the payors are trying to claw this back. And no wonder the pharmacies are fighting so hard to rein in the PBMs.

Basically, specialty pharmacies are charging medicare part D plans up to $1000 per prescription for expensive drugs. What a scam.

--
In other news, the nominee for CMS nominee seems to side with the PBMs:
https://www.youtube.com/watch?v=tqItvm4EaeU

In other words, she is unlikely to press for medicare to negotiate drug prices directly.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on March 16, 2017, 08:13:11 AM
This program looks pretty interesting:
https://www.reducedrx.com

If this expands to other drugs, it would help fix many of the issues with gross versus net pricing.
Title: Re: CVS - CVS Health Corporation
Post by: Jurgis on March 16, 2017, 01:44:42 PM
This program looks pretty interesting:
https://www.reducedrx.com

If this expands to other drugs, it would help fix many of the issues with gross versus net pricing.

I've seen similar (?) drug benefit cards in junk mailer coupon packs in the past. Not sure what was covered, who was paying for the discounts, etc. Never dug deeper.
Title: Re: CVS - CVS Health Corporation
Post by: John Hjorth on March 16, 2017, 02:20:59 PM
Jurgis,

This for real, and the first initiative in cooperation between NVO and CVS to do something real about the US Health Care pricing issues, to obtain and retain sustainable business practices through the Health Care value chain. Original source is here (https://cvshealth.com/newsroom/press-releases/cvs-health-launches-reduced-rx-savings-program-give-patients-access-more).
Title: Re: CVS - CVS Health Corporation
Post by: Jurgis on March 16, 2017, 03:08:28 PM
Jurgis,

This for real, and the first initiative in cooperation between NVO and CVS to do something real about the US Health Care pricing issues, to obtain and retain sustainable business practices through the Health Care value chain. Original source is here (https://cvshealth.com/newsroom/press-releases/cvs-health-launches-reduced-rx-savings-program-give-patients-access-more).

I know it's for real. The cards I received in junk mail in the past were also for real - some people have used them.

The rest of the claims I can't comment on.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on March 17, 2017, 07:28:58 AM
I've seen similar (?) drug benefit cards in junk mailer coupon packs in the past. Not sure what was covered, who was paying for the discounts, etc. Never dug deeper.

AFAIK, most of these cards are sponsored by the brand manufacturers. They encourage you to choose the Brand name drug over the generic.

The CVS card seems different. For one thing, Insulin doesn't have generic competition. But more specifically, as the largest PBM and pharmacy, CVS could use the card more strategically -- negotiating steep discounts and encouraging more cash-pay patients to use CVS pharmacy.

But it is possible that this is just a CVS-branded patient assistance card, and CVS is just collecting an admin fee from the manufacturer. In which case, you are right. These discount programs already exist.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on March 30, 2017, 11:44:43 AM
Given recent Republican infighting, I think CVS is substantially de-risked. It is hard to imagine any willingness or ability of current administration and congress to legislate or regulate PBMs in a catastrophic way. I'm surprised the market hasn't reacted positively to the collapse of the AHCA.

The real risk reverts back to competitive risks. Is CVS competitively disadvantaged because of the integrated PBM/Pharmacy? On balance, I don't think so. Given the strong FCF, capital allocation, secular growth, and non-cyclical earnings, this company deserve at least a market multiple.

Maybe I'm naive, but current sentiment on PBMs seems completely divorced from reality.

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on March 30, 2017, 12:38:13 PM
Given recent Republican infighting, I think CVS is substantially de-risked. It is hard to imagine any willingness or ability of current administration and congress to legislate or regulate PBMs in a catastrophic way. I'm surprised the market hasn't reacted positively to the collapse of the AHCA.

The real risk reverts back to competitive risks. Is CVS competitively disadvantaged because of the integrated PBM/Pharmacy? On balance, I don't think so. Given the strong FCF, capital allocation, secular growth, and non-cyclical earnings, this company deserve at least a market multiple.

Maybe I'm naive, but current sentiment on PBMs seems completely divorced from reality.

I agree & after looking at CVS, WBA, ESRX & others, I chose ESRX.

I understand exactly kind of what they do & who they work for and I prefer their asset light business.

I wish it'd go down another 20%
Title: Re: CVS - CVS Health Corporation
Post by: Jurgis on March 30, 2017, 02:04:07 PM
I've seen similar (?) drug benefit cards in junk mailer coupon packs in the past. Not sure what was covered, who was paying for the discounts, etc. Never dug deeper.

AFAIK, most of these cards are sponsored by the brand manufacturers. They encourage you to choose the Brand name drug over the generic.

The CVS card seems different. For one thing, Insulin doesn't have generic competition. But more specifically, as the largest PBM and pharmacy, CVS could use the card more strategically -- negotiating steep discounts and encouraging more cash-pay patients to use CVS pharmacy.

But it is possible that this is just a CVS-branded patient assistance card, and CVS is just collecting an admin fee from the manufacturer. In which case, you are right. These discount programs already exist.

aaa.com/prescriptions is what I was talking about. ( Site auto detects your location and may not open the same page for Canadians... )

Not arguing with what KCLarkin said. He might be totally right. Just providing additional info.  8)
Title: Re: CVS - CVS Health Corporation
Post by: 50centdollars on March 31, 2017, 05:56:50 AM
Given recent Republican infighting, I think CVS is substantially de-risked. It is hard to imagine any willingness or ability of current administration and congress to legislate or regulate PBMs in a catastrophic way. I'm surprised the market hasn't reacted positively to the collapse of the AHCA.

The real risk reverts back to competitive risks. Is CVS competitively disadvantaged because of the integrated PBM/Pharmacy? On balance, I don't think so. Given the strong FCF, capital allocation, secular growth, and non-cyclical earnings, this company deserve at least a market multiple.

Maybe I'm naive, but current sentiment on PBMs seems completely divorced from reality.

I agree & after looking at CVS, WBA, ESRX & others, I chose ESRX.

I understand exactly what they do & who they work for and I prefer their asset light business.

I wish it'd go down another 20%

What are your thoughts on the Anthem contract, which is 14% of revenues? The relationship has deteriorated and I doubt it gets renewed in 2019. This should lower the intrinsic value of ESRX but that is probably already reflected in the stock.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on March 31, 2017, 08:00:38 AM
Given recent Republican infighting, I think CVS is substantially de-risked. It is hard to imagine any willingness or ability of current administration and congress to legislate or regulate PBMs in a catastrophic way. I'm surprised the market hasn't reacted positively to the collapse of the AHCA.

The real risk reverts back to competitive risks. Is CVS competitively disadvantaged because of the integrated PBM/Pharmacy? On balance, I don't think so. Given the strong FCF, capital allocation, secular growth, and non-cyclical earnings, this company deserve at least a market multiple.

Maybe I'm naive, but current sentiment on PBMs seems completely divorced from reality.

I agree & after looking at CVS, WBA, ESRX & others, I chose ESRX.

I understand exactly what they do & who they work for and I prefer their asset light business.

I wish it'd go down another 20%

What are your thoughts on the Anthem contract, which is 14% of revenues? The relationship has deteriorated and I doubt it gets renewed in 2019. This should lower the intrinsic value of ESRX but that is probably already reflected in the stock.

I think the loss is priced in.

Privately owned Prime Therapeutics or CVS could wind up with the contract (and the subsequent bickering in court with Anthem.)

Interesting take on the WBA/Prime deal which I view as a bigger long term problem for ESRX than losing Anthem.

http://www.drugchannels.net/2016/09/why-walgreensprime-deal-could-transform.html
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on March 31, 2017, 08:59:22 AM
My over-confidence was rewarded with more bad news:

Quote
WOONSOCKET, R.I. (March 31, 2017) Ė CVS Health (NYSE: CVS) confirmed that its contract to provide specialty pharmacy services for the Blue Cross and Blue Shield Federal Employee Program (FEP) will terminate at the end of 2017.

Given that the contract expires at year end, the loss of this contract does not affect the Companyís 2017 financial results. The loss of this specialty pharmacy contract, which is expected to generate revenues of approximately $2.8 billion in 2017, is not expected to have a material impact on the Companyís operating profit in 2018.

As previously announced, under separate agreements which run through 2018, CVS Health will continue to provide integrated pharmacy benefit management (PBM) services, including mail service pharmacy and clinical care programs, to FEPís more than 5.4 million federal employees, retirees and dependents.

Fortunately, this is only the specialty pharmacy (so far). And probably is a natural consequence of the Prime/WBA deal. But this won't help fix the sentiment that CVS' competitive position is weak.

Edit to add: Of course, the rather muted price reaction to this news suggests that it was either priced in or that sentiment is already so bad that even major contract losses won't move the needle.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on April 24, 2017, 01:43:33 PM
Finally some good news for CVS. The Anthem contract with ESRX is officially up for grabs:
http://www.prnewswire.com/news-releases/express-scripts-announces-2017-first-quarter-results-provides-update-on-anthem-relationship-and-visibility-into-core-pbm-business-excluding-contribution-from-anthem-coventry-and-catamaran-300444525.html
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on April 24, 2017, 09:28:55 PM
DooDiligence - looks like you got your 20% decline in ESRX (or pretty close) even though no new news (assuming Anthem was priced in previously).  Are you loading up now?
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 29, 2017, 06:52:40 AM
The whole system, with the PBM's handling enormous amounts dollars, seems to me to be totally screwed by discounts, rebates and the likes, - to an extent, so that a price is no longer just a price.

The pharma companies are trying to deflect pricing scrutiny to the PBMs. There seems to be a growing consensus that PBMs are leaching excessive profits out of the system. But a quick sanity check shows this isn't true.

The entire CVS company, including the retail pharmacy, front-of-store sales, health clinics, PBM, and insurance operations only generated Net Income of $5.2 B in 2015. That's about 1% of US drug spending.

PBMs are not the cause of the price increases. PBMs are using their buying power to demand lower prices. Rather than sacrificing profits, the drug companies are jacking up list prices. It is remarkable how effectively the drug companies have scapegoated the PBMs.

They could become BFF's if PBM's share value based data to help pharma's bolster their brands (except for the fact that would be at odds with generic promotional focus.)
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 29, 2017, 06:56:43 AM
Here is an example of the absurd scapegoating that Big Pharma is doing:
https://www.bloomberg.com/news/articles/2017-02-08/seeing-danger-of-trump-s-new-thing-health-group-preps-defense

Quote
The top executive at British drug giant GlaxoSmithKline Plc took a veiled swipe at the PBM industry on Wednesday, citing an industry-sponsored report that out of every $100 of a drug’s list price, only two-thirds ends up back with the drugmaker.

Much of the rest goes to “non-innovators in a system which thinks it’s paying high prices for innovation,”

--
Bob is shopping in a Mexican street market. He spots a beautiful pottery piggy bank. He decides to buy it for his son. "How much?" he asks. "1000 pesos," replies the seller. Bob walks away.

A little while later, he is drinking a Cerveza with his friend Pablo B Morales. He tells Pablo about the beautiful piggy bank. Pablo replies, "You need to haggle harder. Do you want me to go speak to the seller?".

Pablo goes back to the seller and haggles down the price to 500 pesos. Bob gives Pablo 50 pesos in gratitude.

Bob returns the next year. The seller is now selling piggy banks for 1500 pesos.  And tourists are complaining about the high price of piggy banks. The clever seller says, "you must understand. Only 1/2 of the list price ends up in my pocket. Much of the rest goes to non-innovators in the system."

--
List Price: 1000
Net Price: 500
P.B.M: 50

Who are the "non-innovators" who took the remaining 450 pesos?

Isn't Paz a Mexican?

(not a slur, some of my best friends could be Mexican's...)
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 29, 2017, 07:03:01 AM
DooDiligence - looks like you got your 20% decline in ESRX (or pretty close) even though no new news (assuming Anthem was priced in previously).  Are you loading up now?


Yup.


This thread has more useful commentary on ESRX than the ESRX thread (maybe because I post too much over there...)
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on September 20, 2017, 12:07:38 PM
Liberty already posted this to the Amazon thread but thought I would cross-post here since it is most relevant to the retail pharmacies:
https://www.axios.com/amazon-talking-to-pharmacy-benefit-managers-2487579501.html

I don't really see anything new here. Just more evidence that Amazon is exploring the possibility of entering retail pharmacy. CVS and WBA are selling off slightly on this report.
Title: Re: CVS - CVS Health Corporation
Post by: JRM on September 21, 2017, 05:00:13 AM
That's exactly what we need; fentanyl with 1-click. 

I asked my wife (who is a pharmacist) what percentage of prescriptions are filled through a mail order pharmacy, and to my surprise she said 30-50%.  Maybe somebody else has a better estimate. This was much higher than I suspected.  She said the PBMs and insurance companies are pushing mail order when practical.

However, I think there is a natural ceiling for mail order.  There are many times when a person leaves the doctor or hospital and has a prescription they want to fill immediately.  Maybe Amazon will get same day delivery (or 1 hour delivery), but not likely on a wide scale. Like the grocery business, I think Amazon will need a brick and mortar presence to take much market share from the major players.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on September 21, 2017, 02:29:25 PM
That's exactly what we need; fentanyl with 1-click. 

I asked my wife (who is a pharmacist) what percentage of prescriptions are filled through a mail order pharmacy, and to my surprise she said 30-50%.  Maybe somebody else has a better estimate. This was much higher than I suspected.  She said the PBMs and insurance companies are pushing mail order when practical.

However, I think there is a natural ceiling for mail order.  There are many times when a person leaves the doctor or hospital and has a prescription they want to fill immediately.  Maybe Amazon will get same day delivery (or 1 hour delivery), but not likely on a wide scale. Like the grocery business, I think Amazon will need a brick and mortar presence to take much market share from the major players.

What end of the biz do you think would be most attractive to/for them?

CVS / WBA ...?
ABC / CAH / MCK ...?
ESRX (doubt it but Buddha let it be so...)
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on September 21, 2017, 04:52:42 PM
That's exactly what we need; fentanyl with 1-click. 

I asked my wife (who is a pharmacist) what percentage of prescriptions are filled through a mail order pharmacy, and to my surprise she said 30-50%.  Maybe somebody else has a better estimate. This was much higher than I suspected.  She said the PBMs and insurance companies are pushing mail order when practical.

However, I think there is a natural ceiling for mail order.  There are many times when a person leaves the doctor or hospital and has a prescription they want to fill immediately.  Maybe Amazon will get same day delivery (or 1 hour delivery), but not likely on a wide scale. Like the grocery business, I think Amazon will need a brick and mortar presence to take much market share from the major players.

http://www.drugchannels.net/2017/06/latest-data-on-pharmacy-markets.html

The data on mail order pharmacy suggests it is falling off a cliff in terms of #/% of prescriptions filled - now down to 10% of total (although going up from $ perspective because it is heavily weighted to specialty pharma).   That wouldn't seem to match up with Amazon's strength (cheap prices, great distribution).  Also, with the % of zero co-pay rising, generic prices falling and reduced out of pocket costs, it would be hard to target this industry from Amazon's "your margin is my opportunity" perspective.  Drugs is a strange business where the end users neither decide what product to use nor are they the payer (both generalizations).  Hard to see where Amazon can add value to the equation.
Title: Re: CVS - CVS Health Corporation
Post by: JRM on September 21, 2017, 05:44:01 PM
The only "high margin" operator in this equation is the PBM.  It's good to see that mail order is losing market share.  I  like to be able to talk to the person who verified my prescription. 

I still don't completely understand the value-add of the PBM.  Seems like a real estate agent to me.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on September 21, 2017, 05:56:12 PM
The only "high margin" operator in this equation is the PBM.  It's good to see that mail order is losing market share.  I  like to be able to talk to the person who verified my prescription. 

I still don't completely understand the value-add of the PBM.  Seems like a real estate agent to me.

Supposedly, reducing payers / clients drug spend & improving patient outcomes.
Title: Re: CVS - CVS Health Corporation
Post by: gjangal on September 21, 2017, 07:35:38 PM
IMO to enter the prescription game , AMZN needs become a pharmacy benefit manager or acquire one . It must partner with a insurance companies or large companies that self insure by pitching real reduction in pharmacy costs or better than what PBMs do today. If it manages to do that it can also service prescriptions. Physical storefront with WFM may also help

The main activities of a PBM once you have the members are relatively easy like designing a formulary. Negotiating drug prices and managing patients by making sure they follow through with medication etc
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on September 21, 2017, 07:47:14 PM
The only "high margin" operator in this equation is the PBM.

PBM's have extremely slim gross margins (say 5-10%). Which, I guess, is similar to a real estate agent.
Title: Re: CVS - CVS Health Corporation
Post by: JRM on September 22, 2017, 03:09:13 AM
Express Scripts had an ROE of 20% in 2016.  Down from over 40% in 2011.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 18, 2017, 06:35:38 AM
https://www.forbes.com/sites/brucejapsen/2017/10/18/anthem-partners-with-cvs-health-to-launch-new-pbm/#1140f19a5740
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 26, 2017, 12:24:12 PM
Cross-posting this from Amazon thread:
http://www.stltoday.com/business/local/amazon-gains-wholesale-pharmacy-licenses-in-multiple-states/article_4e77a39f-e644-5c22-b5e6-e613a9ed2512.html

CVS, WBA down today on news that Amazon has wholesale pharmacy licenses. These aren't actual consumer pharmacy licenses but do indicate that Amazon is plotting a move into pharmacy (which we already knew).

Long-term, I'm skeptical that Amazon does enough damage to CVS to justify current price. But in the short-term, the stock is going to get hit on any Amazon news.

Not sure what to do. Don't trust my instinct to double-down. Or my instinct to flee. Probably best to just let the hand play out.
Title: Re: CVS - CVS Health Corporation
Post by: rb on October 26, 2017, 12:34:26 PM
Don't know if this helps.

https://www.bloomberg.com/news/articles/2017-10-26/here-s-what-ceos-are-saying-about-amazon-s-plans-for-domination
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 26, 2017, 12:58:22 PM
Now CVS is allegedly in talks to buy Aetna:
https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

Exciting day.


Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 26, 2017, 07:59:20 PM
Now CVS is allegedly in talks to buy Aetna:
https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

Exciting day.

Any ideas on how they'll finance this?
Seems like debt would be the way to go (exchanging shares would be stupid.)

CVS would be a powerhouse if this passes muster.

Might be cool if they started removing grocery items & expanded the Minute Clinics.

Oh God, I hope they don't start offering dialysis.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on October 26, 2017, 08:12:03 PM
Now CVS is allegedly in talks to buy Aetna:
https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

Exciting day.

I hope that this rumoutpr is not true. The combination of a pharmacy with a health insurer makes no sense to me, and CVS canít really afford this either, they would need to issue a lot of stock to do it.

Stupid mergers often occur a the end of bull markets.
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on October 26, 2017, 08:43:52 PM
Now CVS is allegedly in talks to buy Aetna:
https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

Exciting day.

I hope that this rumoutpr is not true. The combination of a pharmacy with a health insurer makes no sense to me, and CVS canít really afford this either, they would need to issue a lot of stock to do it.

Stupid mergers often occur a the end of bull markets.

Combination of PBM and health insurer is an increasing phenomenon.  OptumRx is the the 3rd largest PBM.  Anthem just announced they are creating their own PBM.   CVS's performance based pharmacy network announced earlier this week is along the same trend, combining $ with outcomes as industry moves to value based care.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on October 27, 2017, 08:31:15 AM
I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 27, 2017, 08:53:30 AM
I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

You could very well be right.

The more I read, the more I kinda don't like it.

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-aetna-merger-20170214-story.html

*edit - Attempts at consolidation of payers through M&A have failed to pass government muster.
Now CVS takes a shot at it from a different angle. - end edit*

If only payers were cheaper.

Not adding 2 CVS here but not selling what little I have (pensive...)
Title: Re: CVS - CVS Health Corporation
Post by: rogermunibond on October 27, 2017, 09:47:02 AM
Going full stack as they say in tech.

Payer
PBM
Retail pharma
Add Primary Care/Minute Clinic expansion
Add hospital care
Add specialty physicians (radiology, ortho, etc)

Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 27, 2017, 10:10:29 AM
I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

The Caremark merger paid off. And so did OptumRX.

But I am inclined to agree. The relatively equal sizes of these two goliaths make me queasy. Tempted to split this bet between CVS and WBA.
Title: Re: CVS - CVS Health Corporation
Post by: HalfMeasure on October 27, 2017, 12:45:59 PM
I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

The Caremark merger paid off. And so did OptumRX.

But I am inclined to agree. The relatively equal sizes of these two goliaths make me queasy. Tempted to split this bet between CVS and WBA.

It's also harder to make the logic work when they're going to be using a good amount of CVS stock @ 7-8x EBITDA to acquire @ 12x - albeit different businesses but the dynamic would be different if either they were in a position to use all cash/debt or issue stock at a premium to the target. I can wrap my head around the business logic but not necessarily the financial logic.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 27, 2017, 02:00:08 PM
$60B+ would build an expensive but ginormous moat.
(no more $4B a year in buybacks? booo...)

United Health & Walgreen should be quaking in their boots.

That said, I don't like Aetna management at all.
(are all these guys such dicks?)
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on October 27, 2017, 04:08:31 PM
The CVS &  Aetna merger sounds more likes what Citicorp did in the 90ís, when they became a financial supermarket they was mediocre and worse at everything. Honest, I think these type of mergers is what you see at the end of bull markets.

I donít get the logic in combining CVS with an insurance company. Sure there is some overlap with drugs, but that could have been done in a more straightforward manner.

Those things like urgent care clinics (what is stopping CVS from getting into this business right now? This probably stuff that investment bankers make up to justify the merger.

The whole thing will leave an unwieldy organization that is potentially over leveraged (if they use debt) and now will have to compete nevertheless in retail and drug distribution with deep pocketed AMZN. I donít see this merger, which distracts more from the business than it helps with synergies helping to compete with AMZN at all. What they will do is pissing off a lot of their customers that they now compete with.

Instead of shaking in their boots, Walgreen with rub their hands and figure out how to catch some of this free fallout from insurance  and retail  customers that  donít like dealing with a company that now competes with them.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 27, 2017, 04:31:31 PM
Thought provoking thread

https://forums.studentdoctor.net/threads/cvs-caremark-and-aetna-misled-medicare-part-d-patients-about-in-network-pharmacies.1115224/
Title: Re: CVS - CVS Health Corporation
Post by: frommi on October 27, 2017, 10:56:13 PM
1.) Merger is far from done
2.) Amazon is not a real threat
3.) Profits are still growing
4.) Stock is unbelievable cheap when you look at FCF/Price (13% Yield) or FCF/EV (10% Yield). That normally only happens when fcf or earnings are falling off a cliff, but i don`t see this here. Based on this the stock is even cheaper than in 2008.
Especially when you look at:
5.) Average tax rate 38.4%.

Most analysts see some good reasons for the merger, its possible that this gets the stock off the Amazon fear list.
Maybe the market focuses on the numbers again after the next earnings. WBA`s earnings weren`t that bad, so i don`t think its unreasonable to see stable or even growing FCF from last quarter.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on October 28, 2017, 05:33:44 AM
1.) Merger is far from done
2.) Amazon is not a real threat
3.) Profits are still growing
4.) Stock is unbelievable cheap when you look at FCF/Price (13% Yield) or FCF/EV (10% Yield). That normally only happens when fcf or earnings are falling off a cliff, but i don`t see this here. Based on this the stock is even cheaper than in 2008.
Especially when you look at:
5.) Average tax rate 38.4%.

Most analysts see some good reasons for the merger, its possible that this gets the stock off the Amazon fear list.
Maybe the market focuses on the numbers again after the next earnings. WBA`s earnings weren`t that bad, so i don`t think its unreasonable to see stable or even growing FCF from last quarter.

I don’t think the FCF yield is that high, so come of the “FCF” in the first half of 2017 came from working capital management. CVS has done a good job managing their inventory levels, especially considering the growth in the business (which came mainly from pharmacy).

in 2016, they had roughly $2.6B in depreciation and amortization and $2.3B in Capes. Assuming that sustainable, their FCF is only a bit higher than their net income, but not much.

I do agree that lowering their tax rate would create a nice windfall, but they is not easy to do with a local operation as they age to pay state income taxes etc. for the operation in a particular state. Trumpf tax plan does nothing to reduce those local taxes.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 28, 2017, 07:38:38 AM
Who gets hit with termination fees? (will Aetna be stupid enuf to do a Humana repeat?)
I understand the reasoning (eliminate competitive bids but...)

on another note, this was kinda funny:

https://jackpineradicals.com/boards/topic/head-of-health-insurance-giant-aetna-slams-sanderss-single-payer-plan-as-lous/
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 28, 2017, 08:15:43 AM
Decent piece by Morningstar
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on October 28, 2017, 08:58:45 AM
I am not denying the need for more integration in health care. A one stop shop exist already it is a non-profit called Kaiser. I had it once for a couple of year and loved it as a customer. it wasnít cheaper than more traditional PPOís but certainly more conventions for the customers.

However when it comes to investing and commercial mergers, the outcome and success is highly path dependent and ai think CVS will have a hard to to manover through the upheaval and make it rewarding for shareholders, consideringh the price they are likely to pay.
It does not  resolve them from having to compete with AMZN either and often one stop shop get beaten by a focused competitor who has limited offering , but does what they do offer really well.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 29, 2017, 06:16:59 PM
https://www.marketwatch.com/story/cvs-aetna-bonds-clobbered-by-takeover-report-2017-10-27

Who are they gonna get financing from JPM?

It just looks so tenuous, expensive & dilutive.

---

OTOH I really like the idea of a Minute Clinic expansion (wouldn't need to own Aetna to do it though.)

Talked to the manager & pharmacist at the CVS down the road from me:

I said "I'll bet all this food & seasonal stuff is less than 20% of revs for you guys"
the manager said "a lot less."

---

I think they stopped selling cigs because doctors offices don't sell cigs.

---

I kinda hope the Aetna thing doesn't go through (at this price...)
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on October 30, 2017, 07:07:14 AM
IF this winds up happening, will UNH or another make a bid for WBA?

Then we might see WBA drop cigs & start chasing CVS?

---

So far, there's no formal offer.
Will one be announced at the upcoming earnings call?

Or will the rumor die & Jim Chanos start shorting the crap out of Aetna for some crazy reason.

That'd be sweet!
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on October 30, 2017, 01:48:22 PM
However when it comes to investing and commercial mergers, the outcome and success is highly path dependent and ai think CVS will have a hard to to manover through the upheaval and make it rewarding for shareholders, consideringh the price they are likely to pay.
It does not  resolve them from having to compete with AMZN either and often one stop shop get beaten by a focused competitor who has limited offering , but does what they do offer really well.

Yes, this is a disaster. Best case scenario, they are right and in a few years (3-5) their market position will be even stronger than it is today. But for the next 3 years, it just adds another overhang to the stock. The story has changed and I need to get out of my position. But the stock is so damned cheap, it is tempting to hold on a bit longer.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on November 06, 2017, 01:00:37 PM
I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

Walgreens is getting cheap, so I may shift funds over there.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 07, 2017, 02:06:06 PM
http://www.reuters.com/article/us-cvs-health-m-a-mckesson/drug-distributor-mckesson-to-buy-cvs-healths-services-unit-idUSKBN1D62RB
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on December 04, 2017, 08:12:51 AM
I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

Walgreens is getting cheap, so I may shift funds over there.

I'm back in, albeit at a smaller position size. The Aetna deal is less dilutive to equity than I expected. CVS shareholders will retain most of the risk and benefits from this deal. Obviously, this means that CVS is adding an enormous amount of debt (4.6x proforma EBITDA). But they will halt buybacks and dividend increases, so CVS should get debt to a manageable level quickly.
http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/AET%20transaction/Copy%20of%20CVS%20Health%20%20Aetna%20Announcement%2012-3-17%20FINAL.pdf

This deal will make stock difficult to own for the next 2-3 years. But after that, it should create significant value. I would prefer to own standalone CVS but still prefer CVS-Aetna over Walgreen's.


Title: Re: CVS - CVS Health Corporation
Post by: frommi on December 04, 2017, 08:54:46 AM
I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

Walgreens is getting cheap, so I may shift funds over there.

I'm back in, albeit at a smaller position size. The Aetna deal is less dilutive to equity than I expected. CVS shareholders will retain most of the risk and benefits from this deal. Obviously, this means that CVS is adding an enormous amount of debt (4.6x proforma EBITDA). But they will halt buybacks and dividend increases, so CVS should get debt to a manageable level quickly.
http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/AET%20transaction/Copy%20of%20CVS%20Health%20%20Aetna%20Announcement%2012-3-17%20FINAL.pdf

This deal will make stock difficult to own for the next 2-3 years. But after that, it should create significant value. I would prefer to own standalone CVS but still prefer CVS-Aetna over Walgreen's.

I did the opposite, there will be a lot of short term pressure from arbitrage plays and the numbers are worse then i expected. I have fair value around 78$ if everything goes according to plan, but since they are levered at 5x EBITDA after the merger, the margin of safety was too small for me. At least i made a little profit over the last 4 weeks. Around 60$ the risk/reward is acceptable to me.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on December 04, 2017, 09:48:54 AM
I agree that in the short-term (2-4 years) CVS is going to be pressured by arbs and then by integration headaches. But shouldn't this be offset by tax reform?





Title: Re: CVS - CVS Health Corporation
Post by: no_free_lunch on December 04, 2017, 10:03:11 AM
At current prices it appears the aetna deal is worth $204 vs AET price of $180.  12% seems fairly decent for merger arb.  Anyone looking at AET?
Title: Re: CVS - CVS Health Corporation
Post by: frommi on December 04, 2017, 10:24:04 AM
I agree that in the short-term (2-4 years) CVS is going to be pressured by arbs and then by integration headaches. But shouldn't this be offset by tax reform?

I factored a lower taxrate into my numbers and the expected synergies. I should still give a reasonable return (8-12%) from here, i am just not willing to endure the short term pain for that return. And maybe they can pull a rabbit out of their hat and get much more out of the vertical integration than they are expecting themselfs. But the leverage is frightening when we get to a recession in the next 2-3 years.
Title: Re: CVS - CVS Health Corporation
Post by: notorious546 on December 05, 2017, 12:58:40 PM
I agree that in the short-term (2-4 years) CVS is going to be pressured by arbs and then by integration headaches. But shouldn't this be offset by tax reform?

I factored a lower taxrate into my numbers and the expected synergies. I should still give a reasonable return (8-12%) from here, i am just not willing to endure the short term pain for that return. And maybe they can pull a rabbit out of their hat and get much more out of the vertical integration than they are expecting themselfs. But the leverage is frightening when we get to a recession in the next 2-3 years.


How has this performed in past recessions?
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on December 05, 2017, 01:33:40 PM
How has this performed in past recessions?

All of the businesses are recession-resistant. CVS grew revenue and earnings during the GFC. CVS will ladder debt maturities and FCF is very strong, so I don't think 4.6x is risky.

The scenarios where 4.6x becomes risky are mostly regulatory or competitive.
Title: Re: CVS - CVS Health Corporation
Post by: frommi on December 05, 2017, 09:54:18 PM
You are right, leverage is not a real problem when they work hard on deleveraging and at the next debt refinancing round interest rates are not a lot higher. So a recession can be a good thing for them when interest rates go down. What i donĎt get is that the arb spread is still so wide, are the regulatory hurdles so high?
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on December 19, 2017, 07:37:29 AM
Looks like CVS got a stay-of-execution from the Amazon threat:
https://www.bloomberg.com/news/articles/2017-12-18/amazon-hasn-t-figured-out-drug-stores-yet-but-it-will-have-to

Unfortunately, the Aetna deal adds new uncertainty to the industry and will likely hold down both CVS and WBA for the foreseeable future.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 19, 2017, 01:47:34 PM
Looks like CVS got a stay-of-execution from the Amazon threat:
https://www.bloomberg.com/news/articles/2017-12-18/amazon-hasn-t-figured-out-drug-stores-yet-but-it-will-have-to

Unfortunately, the Aetna deal adds new uncertainty to the industry and will likely hold down both CVS and WBA for the foreseeable future.

ďAmazon is in the business of saying yes, and pharmacy-benefit managers are in the business of saying no,Ē says George Hill, an analyst at RBC Capital Markets."

* An important distinction which they could circumvent?

---

"Amazon could partner with a pharmacy to deliver online prescriptions through its two-hour delivery service Prime Now, to gauge demand without fully committing. And more recently, executives have mulled using Amazonís voice-activated Alexa platform to remind users when itís time to take pills and order refills."

* Who would partner with them just so they could be destroyed over the next decade?

* Using Alexa could for sure improve adherence.

---

"Drug sales, though, involve long-term contracts covering millions of people through pharmacy-benefit managers, insurers and employers, none of which lend themselves to the rapid-fire experimentation and changes that have been key to Amazonís success with other goods. Consider the complications. When a doctor sends in a prescription, the pharmacy has to check with the patientís insurer to see whether the drug is covered and how much the patient owes, which depends on how much a patient has already paid towards a deductible. Where the drug falls in that particular planís formula also affects the amount the patient has to pay. If the drug isnít covered, the doctor needs to be contactedóby the pharmacy or the patientóto send in a new prescription."

* This will require some serious disruption in the supply chain, not just one link but the entire chain.

---

"Analysts still see plenty of ways for Amazon to enter the prescription drug market. Amazon could use its buying power to snatch up cheap generic drugs directly from manufacturers and sell them for cash to the uninsured, according to SSR Health. This is one place for Amazon to bypass the insurance companies and prescription benefit managers that make selling to insured patients so complex. One of the boldest ideas floated by several analysts would be for Amazon to buy a pharmacy benefits manager like Express Scripts Holdings Co."

* Selling to the uninsured is a great idea (there'll probably be a ton more uninsured soon) but I gotta wonder how many people in this income class actually use Amazon to begin with.

* As to Amazon buying Express Scripts (I'll stand in the back yard & scream for a full 5 minutes if this happens.)

---

"If insured drug-takers become more cost-conscious, Amazon could attempt to bring convenient online price transparency to a complex industry that makes it difficult for customers to shop around. Amazon could be encouraged to push through the complexities to increase the value of Prime membership. Two-thirds of Prime members would fill prescriptions through Amazon if the company offered them, according to research by Cowen Inc."

* GoodRX

---

* The threat to incumbents is real but vending pharmaceuticals is not the same as selling socks...
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 17, 2018, 07:59:11 AM
CVS goes with the Hustler model of using untouched photos to market feminine beauty.

https://cvshealth.com/newsroom/press-releases/cvs-pharmacy-makes-commitment-create-new-standards-post-production
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 19, 2018, 01:36:05 PM
CVS seems a lot better positioned than Express Scripts to accomplish savings for clients / payers.

https://payorsolutions.cvshealth.com/programs-and-services/transform-care/transform-rheumatoid-arthritis-care

---

Opposing views?

I could smack myself for selling ESRX too soon.

It's officially the 1st stock I've ever sold at a loss out of fear.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on January 19, 2018, 05:25:49 PM
"CVS seems a lot better positioned than Express Scripts to accomplish savings for clients / payers."
Cannot help specifically with that assessment but here are some tools.

The "optimization" of clinical care for rheumatoid arthritis has had parallel developments in the medical world and from the "cost management" industry which has been re-defining.
Typical examples (2010 and 2012):
http://www.amcp.org/data/jmcp/593-604.pdf
http://www.ajpb.com/journals/ajpb/2012/ajpb_2012_nov/impact-of-specialty-pharmacy-on-treatment-costs-for-rheumatoid-arthritis
My understanding is that the second link was "sponsored" by Express Scripts.

One of the fundamental problems is that incentives are not optimally aligned for the different players: patient, pharmacy, PBM entity, pharma manufacturer, insurer and the prescriber. For example, stand-alone PBMs have incentives to raise price in order to "capture" larger rebates. Also, categories of patients may benefit from relatively new "disease-modifying" agents which are more expensive. Indiscriminate cost containment may prevent those patients from access to more costly medications that may reduce complications and follow-up visits (good for insurer, especially if profit motivated) and may decrease long term disability and improve capacity to work and quality of life (good for the non-profit organization like Kaiser or the government who may be the ultimate payer somehow).

At this point, for rheumatoid arthritis, as well as for many other diseases, a very significant portion of patients do not get the effective care they need or get inappropriate (and often costly) treatments.
https://www.volksgezondheidenzorg.info/sites/default/files/bombardier_2012.pdf

Interestingly, a lot of useful data is available and the future seems to lie in the organization of this data into guidelines and algorithms.
http://www.ajmc.com/journals/supplement/2014/ace017_may14_ra-ce/ace017_may14_ra-ce_owens_s145tos152?p=1

FWIW, I don't see a long term viable moat for stand-alone PBMs. Integration of the PBMs into the insurer would go along way in terms of incentive alignment. Traditionally, stand-alone PBMs have described a dual role: cost containment and strategies to improve management. This dual mandate makes more sense when the payer is part of the equation.
https://client-prod.optumrx.com/vgnlive/CLP/Assets/PDF/RADTMWhitePaperFINAL.pdf

Simple telephone follow-ups by a nurse (or soon an alexa-type personal assistant) to the patient to optimize appointments, patient education, timely referral to rheumatologist and compliance. My opinion is that the profitable disruptive edge lies in the optimization and coordination of care.

FWIW, I don't see a convincing advantage in the combination of pharmacies and insurers.

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 20, 2018, 07:45:46 AM
"CVS seems a lot better positioned than Express Scripts to accomplish savings for clients / payers."
Cannot help specifically with that assessment but here are some tools.

The "optimization" of clinical care for rheumatoid arthritis has had parallel developments in the medical world and from the "cost management" industry which has been re-defining.
Typical examples (2010 and 2012):
http://www.amcp.org/data/jmcp/593-604.pdf
http://www.ajpb.com/journals/ajpb/2012/ajpb_2012_nov/impact-of-specialty-pharmacy-on-treatment-costs-for-rheumatoid-arthritis
My understanding is that the second link was "sponsored" by Express Scripts.

One of the fundamental problems is that incentives are not optimally aligned for the different players: patient, pharmacy, PBM entity, pharma manufacturer, insurer and the prescriber. For example, stand-alone PBMs have incentives to raise price in order to "capture" larger rebates. Also, categories of patients may benefit from relatively new "disease-modifying" agents which are more expensive. Indiscriminate cost containment may prevent those patients from access to more costly medications that may reduce complications and follow-up visits (good for insurer, especially if profit motivated) and may decrease long term disability and improve capacity to work and quality of life (good for the non-profit organization like Kaiser or the government who may be the ultimate payer somehow).

At this point, for rheumatoid arthritis, as well as for many other diseases, a very significant portion of patients do not get the effective care they need or get inappropriate (and often costly) treatments.
https://www.volksgezondheidenzorg.info/sites/default/files/bombardier_2012.pdf

Interestingly, a lot of useful data is available and the future seems to lie in the organization of this data into guidelines and algorithms.
http://www.ajmc.com/journals/supplement/2014/ace017_may14_ra-ce/ace017_may14_ra-ce_owens_s145tos152?p=1

FWIW, I don't see a long term viable moat for stand-alone PBMs. Integration of the PBMs into the insurer would go along way in terms of incentive alignment. Traditionally, stand-alone PBMs have described a dual role: cost containment and strategies to improve management. This dual mandate makes more sense when the payer is part of the equation.
https://client-prod.optumrx.com/vgnlive/CLP/Assets/PDF/RADTMWhitePaperFINAL.pdf

Simple telephone follow-ups by a nurse (or soon an alexa-type personal assistant) to the patient to optimize appointments, patient education, timely referral to rheumatologist and compliance. My opinion is that the profitable disruptive edge lies in the optimization and coordination of care.

FWIW, I don't see a convincing advantage in the combination of pharmacies and insurers.

I'm in agreement with everything you said except the last bit.

I believe retail pharmacies (and patients) can both benefit from improved adherence & lower costs.
Vertical integration seems like it would give more access to tools & data (less protectionism) at POS & in homes; which should lead to better outcomes.
There needs to be some push & pull with regards to prices & efficacy, which in my mind, will lead to a kind of democratization.

I'm not sure if I'm just trying to justify being long CVS here or if I'm really being intellectually honest.

---

Either way, Express Scripts does seem like a zombie unless they get owned by someone important (which I don't see until they're a lot more affordable.)

That said, my previous employer just re-signed with Express Scripts (I'm on COBRA) but I don't believe they have the expertise or willingness to really evaluate the landscape of alternatives.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on January 20, 2018, 01:13:02 PM
"Vertical integration seems like it would give more access to tools & data (less protectionism) at POS & in homes; which should lead to better outcomes.
There needs to be some push & pull with regards to prices & efficacy, which in my mind, will lead to a kind of democratization."
Points well taken.

But,

-concerning the recent merger and "synergies".
I understand that when soda syrup makers looked into spinning off the bottlers, financial intermediary reports suggested there was value.
And when the syrup makers looked into bringing the subs/ventures back in house, financial intermediary reports suggested there was value.
I suggest that there was displacement of value with a commission.
If you like CVS and if you like Aetna, you can like CVS-Aetna but I submit that 1+1=2 minus friction costs.

-concerning integration at this stage of the game.
The merger is a form of backward integration. It occurs at a time when perhaps $ (and management attention) should be injected in R+D in order to offer a superior product and maybe as a "response" to potential threats coming from a completely different direction.
Quote from an old report (Robert H. Hayes and William J. Abernathy, ďManaging Our Way to Economic Decline,Ē HBR JulyĖAugust 1980) trying to delineate when vertical integration made sense:
"Sometimes the problem for managers is not their reluctance to take action and make investments but that, when they do so, their action has the unintended result of reinforcing the status quo. In deciding to integrate backward because of apparent short-term rewards, managers often restrict their ability to strike out in innovative directions in the future."

I respect your opinion but I think that the recent merger has more to do with the potential mirage of short term financial gains at the expense of long term competitiveness.

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on January 20, 2018, 08:44:21 PM
"Vertical integration seems like it would give more access to tools & data (less protectionism) at POS & in homes; which should lead to better outcomes.
There needs to be some push & pull with regards to prices & efficacy, which in my mind, will lead to a kind of democratization."
Points well taken.

But,

-concerning the recent merger and "synergies".
I understand that when soda syrup makers looked into spinning off the bottlers, financial intermediary reports suggested there was value.
And when the syrup makers looked into bringing the subs/ventures back in house, financial intermediary reports suggested there was value.
I suggest that there was displacement of value with a commission.
If you like CVS and if you like Aetna, you can like CVS-Aetna but I submit that 1+1=2 minus friction costs.

-concerning integration at this stage of the game.
The merger is a form of backward integration. It occurs at a time when perhaps $ (and management attention) should be injected in R+D in order to offer a superior product and maybe as a "response" to potential threats coming from a completely different direction.
Quote from an old report (Robert H. Hayes and William J. Abernathy, ďManaging Our Way to Economic Decline,Ē HBR JulyĖAugust 1980) trying to delineate when vertical integration made sense:
"Sometimes the problem for managers is not their reluctance to take action and make investments but that, when they do so, their action has the unintended result of reinforcing the status quo. In deciding to integrate backward because of apparent short-term rewards, managers often restrict their ability to strike out in innovative directions in the future."

I respect your opinion but I think that the recent merger has more to do with the potential mirage of short term financial gains at the expense of long term competitiveness.

I've read a lot of your stuff & am grateful for your thoughts & the facts / links you dig up & share (here & elsewhere.)

Analysts should start issuing Fingers Crossed ratings.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on March 08, 2018, 06:29:45 AM
Cigna buying ESRX should make the CVS-AET integration less risky. One of the concerns with the merger is that insurers might want to use an independent PBM, rather than work with a competitor. With all of the top PBMs now aligned with an insurer, this is no longer a threat. And CVS continues to be uniquely positioned since they also own a retail pharmacy. Feeling better about the merger now.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 11, 2018, 07:06:27 AM
Not sure whether this belongs in the Davita thread or here.

https://www.cnbc.com/2018/04/04/cvs-health-eyes-kidney-patients-for-next-expansion-into-care.html
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 25, 2018, 05:07:38 AM
https://www.cnbc.com/2018/04/13/cvs-minuteclinics-hires-marc-david-munk-as-chief-medical-officer.html
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on April 26, 2018, 07:06:32 AM
https://www.cnbc.com/2018/04/13/cvs-minuteclinics-hires-marc-david-munk-as-chief-medical-officer.html

Interesting nomination.
Mr. Munk is an advocate of innovation.
His focus is on primary care (first line) reform, value-based care and patient-centered outcomes.
I understand that he has worked on algorithms to facilitate timely referral to specialized resources.

But what is value in healthcare?
http://www.nejm.org/doi/full/10.1056/NEJMp1011024

One of the issues is precision versus accuracy. The "system" now is quite good in terms of the precision of many processes but relatively poor at the accuracy of outcomes. A lot of work to be done.

What does it mean for CVS?

IMO, despite the above nomination, they may have to deal with legacy thinking embedded in large institutions that benefit from the status quo.

https://www.hhs.gov/sites/default/files/fy-2017-hhs-agency-financial-report.pdf
Do not read unless you have an unusual interest.
The key parts describe "improper payments" for various programs (numbers are huge).
The report is a typical example of how large organizations can describe problems without realizing that they are part of THE problem.
May need your margin is my opportunity type of thinking.
The entrants will come from the outside.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on April 27, 2018, 07:17:50 AM
https://www.cnbc.com/2018/04/13/cvs-minuteclinics-hires-marc-david-munk-as-chief-medical-officer.html

Interesting nomination.
Mr. Munk is an advocate of innovation.
His focus is on primary care (first line) reform, value-based care and patient-centered outcomes.
I understand that he has worked on algorithms to facilitate timely referral to specialized resources.

But what is value in healthcare?
http://www.nejm.org/doi/full/10.1056/NEJMp1011024

One of the issues is precision versus accuracy. The "system" now is quite good in terms of the precision of many processes but relatively poor at the accuracy of outcomes. A lot of work to be done.

What does it mean for CVS?

IMO, despite the above nomination, they may have to deal with legacy thinking embedded in large institutions that benefit from the status quo.

https://www.hhs.gov/sites/default/files/fy-2017-hhs-agency-financial-report.pdf
Do not read unless you have an unusual interest.
The key parts describe "improper payments" for various programs (numbers are huge).
The report is a typical example of how large organizations can describe problems without realizing that they are part of THE problem.
May need your margin is my opportunity type of thinking.
The entrants will come from the outside.

Nice, I never knew that Porter wrote on the healthcare system.

It seems like payers and their partners (ESRX, etc.), and operators like CVS, who are nibbling around the edges of traditional healthcare delivery systems (hospitals, etc.), should be able to measure and act on these value based elements?

I don't know if I've chosen wisely with CVS but I feel fairly comfortable with the story I've created in my head.

Thanks.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on April 28, 2018, 05:41:50 AM
CVS and the MinuteClinic story is compelling in a lot of ways.

The industry is ripe for change and change is likely to be rapid once a still undefined threshold has been reached but it may take a while and those with deep pockets may benefit when the plot thickens.

The "consumers" have had to (and will) pay more directly out of pocket and, for the part that is "shoppable", clinics that are run by retailers may have a relative edge.
Title: Re: CVS - CVS Health Corporation
Post by: Txvestor on April 28, 2018, 06:47:22 PM
I can assure you minute clinic is no competitive edge for CVS.
CVS/Aetna or Walmart/Humana are 3rd rate competitors to UNH and its well oiled operations up and down the health care spectrum. It's not even close.
Its a situation where I beleive the valuation gap does not adequately address the qualitative gap.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on April 29, 2018, 06:23:01 AM
CVS and the MinuteClinic story is compelling in a lot of ways.

The industry is ripe for change and change is likely to be rapid once a still undefined threshold has been reached but it may take a while and those with deep pockets may benefit when the plot thickens.

The "consumers" have had to (and will) pay more directly out of pocket and, for the part that is "shoppable", clinics that are run by retailers may have a relative edge.

I believe change in healthcare will be much much slower than some assume. The complexity, thr obvious importance of quality, inertia and the government involvement will very likely make this a multi decade effort. I am not sure that even AMZN has enough patience for this, they are known for their willingness to experiment, but they also quickly discard experiments that arenít working either.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on May 02, 2018, 09:51:33 AM
CVS reported very good earnings this morning. The retail script volume was particularly strong.

They released 2018 adjusted EPS guidance of 6.87-7.08. With this mornings price drop, it is now trading at less than 10x forward earnings. Aetna transaction makes things a bit murky, but a consumer staple trading at less than 10x seems like a good bet.
Title: Re: CVS - CVS Health Corporation
Post by: wolverine890 on May 03, 2018, 07:47:11 AM
Tell me if I am thinking about this wrong...

I was looking over CVS's Bond issuance this morning and it looks like there move at the beginning of the year was perfect timing on refinancing the company. They issued $40B in debt at an average rate of 4.1% (it was oversubscribed). Currently they have a little under $15B of callable debt trading below par. If the deal doesn't go through they could buy back their callable debt, which trades at an average discount to par between 8-2% reaping a meaningful profit? Additionally, they would reduce the leverage/risk of the current company and cover future debt issuance at low rates for years to come.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on May 07, 2018, 09:55:04 AM
CVS reported very good earnings this morning. The retail script volume was particularly strong.

They released 2018 adjusted EPS guidance of 6.87-7.08. With this mornings price drop, it is now trading at less than 10x forward earnings. Aetna transaction makes things a bit murky, but a consumer staple trading at less than 10x seems like a good bet.

The drop last weeks seems to be due to regulatory concerns. Specifically:
https://www.cnbc.com/2018/05/06/health-care-trump-set-to-unveil-drug-price-policy.html

I am highly sceptical of the Trump administration but Alex Azar seems highly competent. So this might actually turn into something. However, these are dynamic systems. If you legislate that rebates be passed to consumers (or make other policy changes), the system will likely adapt in ways that roughly preserve the current profit pools.

This is most obvious in Part D plans. If you pass the rebates on to the patients, then the plan sponsors will just raise premiums. This might be good policy, but won't materially impact profit pools.

The PBMs claim to already be passing on the rebates to plan sponsors, so they theoretically would see little impact. Though there is some debate about whether the PBMs are being honest about rebate pass-throughs.

Title: Re: CVS - CVS Health Corporation
Post by: wolverine890 on May 31, 2018, 12:00:29 PM
https://www.wsj.com/articles/why-cvs-loves-obamacare-1527633490?mod=searchresults&page=1&pos=1
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on May 31, 2018, 01:26:49 PM
https://www.wsj.com/articles/why-cvs-loves-obamacare-1527633490?mod=searchresults&page=1&pos=1

If your business thrives on complexity and non-transparency, additional layers are welcome.
Another similar perspective:
https://politicalcalculations.blogspot.com/2018/05/bending-health-care-cost-curve-ever.html#.WxBYjUxFzid
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on June 01, 2018, 08:31:46 AM
https://www.wsj.com/articles/why-cvs-loves-obamacare-1527633490?mod=searchresults&page=1&pos=1

If your business thrives on complexity and non-transparency, additional layers are welcome.
Another similar perspective:
https://politicalcalculations.blogspot.com/2018/05/bending-health-care-cost-curve-ever.html#.WxBYjUxFzid

Maybe I'm dense but isn't it obvious that if more people are covered by health insurance that the average expenditure on health is going to go up? Anyway, ignoring the ACA political war, this actually shows average drug expenditures going down.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on June 01, 2018, 04:25:46 PM


Maybe I'm dense but isn't it obvious that if more people are covered by health insurance that the average expenditure on health is going to go up? Anyway, ignoring the ACA political war, this actually shows average drug expenditures going down.

BTW, I appreciate and learn when reading your posts.
Healthcare is kind of complex and the above reference I submitted is relatively poor.

The point is that CVS (now with Aetna) like other health insurers have shown in the past that they can adapt.

The potential insights from the politicalculations graphs are:
-All increases in healthcare costs are moderating (still above GDP) but some costs (administrative) keep rising ++.
-With insurance, the idea is to pool the risks with the understanding that there will be some administrative costs and with the expectation that for-profit organizations will obtain a reasonable return. The graphs would tend to corroborate data showing that administrative costs are very high and that insurers have been unusually efficient at capturing profits after the final ACA provisions were enacted.

Another potential insight is that the government is subsidizing more and more these "abnormal" profits.

The biggest risk is regulatory and I submit that this risk may be maximized when the government becomes your biggest client.
But who knows how this will turn out?

For interest, a recent link that says the same thing, using different words:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf



Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on June 03, 2018, 07:54:15 AM


Maybe I'm dense but isn't it obvious that if more people are covered by health insurance that the average expenditure on health is going to go up? Anyway, ignoring the ACA political war, this actually shows average drug expenditures going down.

BTW, I appreciate and learn when reading your posts.
Healthcare is kind of complex and the above reference I submitted is relatively poor.

The point is that CVS (now with Aetna) like other health insurers have shown in the past that they can adapt.

The potential insights from the politicalculations graphs are:
-All increases in healthcare costs are moderating (still above GDP) but some costs (administrative) keep rising ++.
-With insurance, the idea is to pool the risks with the understanding that there will be some administrative costs and with the expectation that for-profit organizations will obtain a reasonable return. The graphs would tend to corroborate data showing that administrative costs are very high and that insurers have been unusually efficient at capturing profits after the final ACA provisions were enacted.

Another potential insight is that the government is subsidizing more and more these "abnormal" profits.

The biggest risk is regulatory and I submit that this risk may be maximized when the government becomes your biggest client.
But who knows how this will turn out?

For interest, a recent link that says the same thing, using different words:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf

Here's to hoping that the Guv doesn't turn it all into a Davita/ESRD, loss leader, type payment schedule.

Unless, of course, that system actually makes quality healthcare super cheap or free to all of us (without shifting the burden back to us as taxpayers) & offsets the investment losses (I know, right?)

---

On another note, I believe this was mentioned before but,

https://www.healio.com/nephrology/home-dialysis/news/print/nephrology-news-and-issues/%7B143b37ed-6aa6-4d1a-b1a0-4230811fe01d%7D/cvs-health-reveals-more-details-about-plans-for-ckd-care-home-dialysis
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 08, 2018, 04:12:44 AM
I was recently reminded in a post about insurance, that I didn't write anything about my visit to the Minute Clinic, so here goes.

As many of you will remember, and would like to forget, I had a stye on my eye and had visited a Baptist Hospital Urgent Care Clinic, twice, with no cure.

In the shipping world this would be a "no cure, no pay" situation but I still had to make a copay.

It finally dawned on me that this was an opportunity to experience a CVS Minute Clinic first hand.

Initially, I was underwhelmed.

I checked in through an electronic kiosk emblazoned with signs and ironically, one of the signs said that they are affiliated with Baptist Healthcare system, so I wasn't expecting my stye to get any better as a result of the visit.

Next, I looked over to the waiting room which was just a row of chairs along the back wall in a way which screamed "this is NOT a doctors office"

The "waiting room" was facing an isle of nostrums that did not instill further confidence in my upcoming medical consultation (it also did not attract me to any kind of impulse purchase.) Somehow, I believe I should have been staring at a gigantic magazine rack surrounded by a well thought out display of ???

On another note, this particular CVS location is the only Minute Clinic in Pensacola and it is a poor choice for a clinic as there are others which have layouts that would give a better "doctors office" feel (I sent a message to the BOD about this recently.)

BTW, even though the waiting area was poorly thought out, there was standing room only and a steady trickle of new patients were coming in.

The person who treated me was a PA and she was very professional and knowledgable and more importantly, she prescribed a different set of oral antibiotics and an antibio cream, which subsequently made the stye go away.

I walked straight over to the pharmacy counter and picked up my prescription.

This is not necessarily a ringing endorsement of the Minute Clinics and it is obvious from this one anecdotal experience that they have a lot of work to do.

The end?
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on November 08, 2018, 05:18:16 AM
The end?
CVS recently reported decent results with significant free cash flow generation. They seem to meet the usual acquisition hurdles and, maybe, the best is yet to come. Will watch.

They seem to have some willingness to try things.
Interesting example:
https://www.bizjournals.com/bizwomen/news/latest-news/2018/11/cvs-pharmacy-launches-pilot-membership-program.html
It smells like a reactive move to a certain competitor but reaction is probably better than inaction and a lot of first movers will fall.

For your case (if you want to disclose the info), what was your part of the bill (co-pay and deductible) and what was the total amount of the bill?

For a superficial and visually apparent condition such as yours, online consultation seems like a good option. In my area where healthcare is "free", innovation sometimes comes from the embryonic private sector. Recently, a dermatologist started to offer a consultation option based on an online platform which seems to be quite efficient (to make an appointment, list data, upload photos and virtually "meet" the specialist). The fee, which does not cover the prescription costs, is 180$ (CDN) to get an appointment within 72 hours and 250$, within 24 hours.
I understand that this is also becoming available in the Great Again country, hear that fees as low as 59$ (USD) are advertised and that CVS may have showed an interest:
https://cvshealth.com/newsroom/press-releases/cvs-healths-minuteclinic-introduces-new-virtual-care-offering

But they will have to work on their bill length.
https://nypost.com/2018/11/02/woman-gets-6-foot-cvs-receipt-after-buying-3-items/
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 08, 2018, 06:12:20 PM
The end?
CVS recently reported decent results with significant free cash flow generation. They seem to meet the usual acquisition hurdles and, maybe, the best is yet to come. Will watch.

They seem to have some willingness to try things.
Interesting example:
https://www.bizjournals.com/bizwomen/news/latest-news/2018/11/cvs-pharmacy-launches-pilot-membership-program.html
It smells like a reactive move to a certain competitor but reaction is probably better than inaction and a lot of first movers will fall.

For your case (if you want to disclose the info), what was your part of the bill (co-pay and deductible) and what was the total amount of the bill?

For a superficial and visually apparent condition such as yours, online consultation seems like a good option. In my area where healthcare is "free", innovation sometimes comes from the embryonic private sector. Recently, a dermatologist started to offer a consultation option based on an online platform which seems to be quite efficient (to make an appointment, list data, upload photos and virtually "meet" the specialist). The fee, which does not cover the prescription costs, is 180$ (CDN) to get an appointment within 72 hours and 250$, within 24 hours.
I understand that this is also becoming available in the Great Again country, hear that fees as low as 59$ (USD) are advertised and that CVS may have showed an interest:
https://cvshealth.com/newsroom/press-releases/cvs-healths-minuteclinic-introduces-new-virtual-care-offering

But they will have to work on their bill length.
https://nypost.com/2018/11/02/woman-gets-6-foot-cvs-receipt-after-buying-3-items/

The Minute Clinic receipt was printed on an 8.5 x 11 sheet & listed a charge of $129. (my co-pay was $33.)
The prescription consisted of Tobramycin 0.3% eye drops ($12.57) & Cephalexin 500mg capsules ($4.29).

Baptist Urgent Care cost $33 x 2 & the prescription was for Bacitracin 500 unit/gm OPHTH ointment ($75 & ineffective).

---

I'm betting that CVS will be successful in the long run & will have it's ups & downs (whether the Minute Clinics will ever be anything WTFK?)
I don't need the money ATM & am feeling very patient so we'll see.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on November 08, 2018, 08:33:12 PM
I'm betting that CVS will be successful in the long run & will have it's ups & downs (whether the Minute Clinics will ever be anything WTFK?)
I don't need the money ATM & am feeling very patient so we'll see.
Thanks for the follow-up.
20 years ago, I also bought a pharmacy retailer (one of my first stocks, pharmacy chain based in Canada) and sold it around 2004 because of a planned expansion in what I considered to be Fortress Retail, USA. Then, the #1 was Walgreens and the #2 was CVS. As 2018 nears its end, the #1 is still Walgreens and the #2 is still CVS. The more it changes... So your "bet" is reasonable for the long run to come. Fascinating though, because the parallel path is possibly reaching a juncture because the two are taking 2 fundamentally different directions.

An exercise I've done over the years is to follow the two, side by side (ŗ la Ben Graham) and submit the following report for your interest:
https://www.fungglobalretailtech.com/wp-content/uploads/2018/08/CVS-and-Walgreens-AUG-20-2018.pdf

If I'd be a betting man, I would go with Walgreens but I'm not.

PS Bacitracin is still in use but has a nice historical feature. The drug was named because of a girl named Traci (misspelled in fact).
https://web.archive.org/web/20140428190211/https://files.nyu.edu/jmm257/public/other/bacitracin.html
Talk about an enduring moat.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 09, 2018, 07:30:40 PM
I'm betting that CVS will be successful in the long run & will have it's ups & downs (whether the Minute Clinics will ever be anything WTFK?)
I don't need the money ATM & am feeling very patient so we'll see.
Thanks for the follow-up.
20 years ago, I also bought a pharmacy retailer (one of my first stocks, pharmacy chain based in Canada) and sold it around 2004 because of a planned expansion in what I considered to be Fortress Retail, USA. Then, the #1 was Walgreens and the #2 was CVS. As 2018 nears its end, the #1 is still Walgreens and the #2 is still CVS. The more it changes... So your "bet" is reasonable for the long run to come. Fascinating though, because the parallel path is possibly reaching a juncture because the two are taking 2 fundamentally different directions.

An exercise I've done over the years is to follow the two, side by side (ŗ la Ben Graham) and submit the following report for your interest:
https://www.fungglobalretailtech.com/wp-content/uploads/2018/08/CVS-and-Walgreens-AUG-20-2018.pdf

If I'd be a betting man, I would go with Walgreens but I'm not.

PS Bacitracin is still in use but has a nice historical feature. The drug was named because of a girl named Traci (misspelled in fact).
https://web.archive.org/web/20140428190211/https://files.nyu.edu/jmm257/public/other/bacitracin.html
Talk about an enduring moat.

Thanks, I just got through the Walgreen v CVS report (and the Tracy story.)

Hmmm...
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on November 30, 2018, 06:54:44 AM
CVS completes the purchase of Aetna.

It's the latest merger between two major healthcare players that could affect tens of millions of Americans. Last week, CVS and insurance giant Aetna finalized a nearly $70 billion merger. The deal could impact where people get their care, how they get their drugs and how much choice they have. Judy Woodruff discusses with Larry Merlo, CEO of CVS Health.

https://youtu.be/vuBca96cUUw

Managements value proposition for this merger? Merlo says (in the last part of the interview) that $300B a year in drug spend is wasted due to patient non-conformance to prescriptions and he wants to use the merger of Aetna to increase adherence by reinforcement with face to face interactions.

---

Merlo said Wednesday that he expects one of the first initiatives of the new company would be to roll out some expanded clinics and ďlearn from our customers in terms of what they value and what perhaps we need to go back to the drawing board on.Ē

https://www.courant.com/business/hc-biz-cvs-aetna-closing-20181128-story.html

---

Here's another older pre-merger interview of Merlo & Bertolini on CNBC where they discuss the merger. They go into their ideas on the regulatory & political aspects of healthcare delivery.

https://youtu.be/-FzZN4v-LUI

---

I'd like to hear any & all negative ideas to counterbalance, and even overwhelm, my bullish sentiment for the next decade.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on December 01, 2018, 05:48:28 AM
CVS completes the purchase of Aetna.

It's the latest merger between two major healthcare players that could affect tens of millions of Americans. Last week, CVS and insurance giant Aetna finalized a nearly $70 billion merger. The deal could impact where people get their care, how they get their drugs and how much choice they have. Judy Woodruff discusses with Larry Merlo, CEO of CVS Health.

https://youtu.be/vuBca96cUUw

Managements value proposition for this merger? Merlo says (in the last part of the interview) that $300B a year in drug spend is wasted due to patient non-conformance to prescriptions and he wants to use the merger of Aetna to increase adherence by reinforcement with face to face interactions.

---

Merlo said Wednesday that he expects one of the first initiatives of the new company would be to roll out some expanded clinics and ďlearn from our customers in terms of what they value and what perhaps we need to go back to the drawing board on.Ē

https://www.courant.com/business/hc-biz-cvs-aetna-closing-20181128-story.html

---

Here's another older pre-merger interview of Merlo & Bertolini on CNBC where they discuss the merger. They go into their ideas on the regulatory & political aspects of healthcare delivery.

https://youtu.be/-FzZN4v-LUI

---

I'd like to hear any & all negative ideas to counterbalance, and even overwhelm, my bullish sentiment for the next decade.
Not much to add but read the following this AM:
https://www.law.com/nationallawjournal/2018/11/29/justice-dept-lawyer-faces-wrath-of-judge-whos-still-weighing-cvs-aetna-deal/?slreturn=20181101081336

This seems to be a simple case of an over-sensitive judge but underlines a potential underlying driver: arrogance.

In the stuff that you submit above, Ken Langone politely suggests to not forget the customer and mentions that, so far, the "bragging" of the industry about their results (which are financial in nature) has not translated in better quality/cost for the "consumer". It's hard to believe Mr. Langone's personal and anecdotal direct experience with CVS but maybe the lesson here is to maintain the connection with main street even when you reach the high spheres of power. Keeping both feet on the ground is compatible with reaching higher grounds but it means you may need to "share" your margin expansion that comes with increasing market concentration.

So investing in CVS for the long term means that you believe that they (combined entity) are ready to adapt to an environment where the end result will be a better and more affordable product for the end user. Arrogance, if it persists, will make the achievement of that goal more difficult.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 01, 2018, 11:03:31 AM
CVS completes the purchase of Aetna.

It's the latest merger between two major healthcare players that could affect tens of millions of Americans. Last week, CVS and insurance giant Aetna finalized a nearly $70 billion merger. The deal could impact where people get their care, how they get their drugs and how much choice they have. Judy Woodruff discusses with Larry Merlo, CEO of CVS Health.

https://youtu.be/vuBca96cUUw

Managements value proposition for this merger? Merlo says (in the last part of the interview) that $300B a year in drug spend is wasted due to patient non-conformance to prescriptions and he wants to use the merger of Aetna to increase adherence by reinforcement with face to face interactions.

---

Merlo said Wednesday that he expects one of the first initiatives of the new company would be to roll out some expanded clinics and ďlearn from our customers in terms of what they value and what perhaps we need to go back to the drawing board on.Ē

https://www.courant.com/business/hc-biz-cvs-aetna-closing-20181128-story.html

---

Here's another older pre-merger interview of Merlo & Bertolini on CNBC where they discuss the merger. They go into their ideas on the regulatory & political aspects of healthcare delivery.

https://youtu.be/-FzZN4v-LUI

---

I'd like to hear any & all negative ideas to counterbalance, and even overwhelm, my bullish sentiment for the next decade.
Not much to add but read the following this AM:
https://www.law.com/nationallawjournal/2018/11/29/justice-dept-lawyer-faces-wrath-of-judge-whos-still-weighing-cvs-aetna-deal/?slreturn=20181101081336

This seems to be a simple case of an over-sensitive judge but underlines a potential underlying driver: arrogance.

In the stuff that you submit above, Ken Langone politely suggests to not forget the customer and mentions that, so far, the "bragging" of the industry about their results (which are financial in nature) has not translated in better quality/cost for the "consumer". It's hard to believe Mr. Langone's personal and anecdotal direct experience with CVS but maybe the lesson here is to maintain the connection with main street even when you reach the high spheres of power. Keeping both feet on the ground is compatible with reaching higher grounds but it means you may need to "share" your margin expansion that comes with increasing market concentration.

So investing in CVS for the long term means that you believe that they (combined entity) are ready to adapt to an environment where the end result will be a better and more affordable product for the end user. Arrogance, if it persists, will make the achievement of that goal more difficult.

I agree and did catch the admonition by the Mr. Langone but I didn't extrapolate what you so wisely pointed out.

---

I'm looking further into Merlo, the man, and found the following.

https://moneyinc.com/cvs-health-ceo-larry-j-merlo/

The link is a pretty quick read but here's my takeaways.

His Dad died of tobacco related cancer which may have been more of a driver in halting cig sales at CVS. I had thought it was because he wanted to make CVS look more like a healthcare facility, which may still be true but...

He started out as a pharmacist, which gives him direct insight into operations at the customer level but still doesn't answer the question of whether he'll act to lower costs.

---

For a slightly more in depth, and possibly biased look:

https://www.courant.com/business/hc-biz-larry-merlo-ceo-cvs-20171228-story.html

To me, the following quote shows how he wants to make more money for CVS by selling more drugs, and save costs for Aetna by targeting adherence.

ďHe understands how sometimes spending more money on drugs makes the overall cost of a disease less,Ē she said. ďSo if someone is taking their diabetes medicine, for instance, the diabetes medications are going to cost more money, but the reality is they may stay out of the hospital. So the overall cost is lower.Ē

The invitation to sit with Michelle Obama at the inauguration is interesting too.

"The same year, CVSí decision to stop selling cigarettes drew plenty of positive attention, including an invitation to sit with former First Lady Michelle Obama at the next State of the Union address. At the White House, Obama advocated healthy living and President Barack Obama struggled to kick the smoking habit."

and this one could be BS but leads me to believe he's a thoughtful guy:

"Muskin likes to tell the story of a swing through California last year with Merlo and other CVS executives to visit big investors in the company. A Suburban pulled up to transport Merlo and the others and Merlo was pulling on the lever to go into the third row of the vehicle."

ďThis guy is running a top S&P 500, Top 25 company, billions of dollars and there he is crawling into the back of a Suburban,Ē Mushkin said. ďItís kind of who he is.Ē

---

I have to get back to studying for finals & a jury for piano proficiency but will delve back in to Ken Langone to see if he has anything new to say on CVS because he seems sharp. The following story may just be him claiming to have dodged Madoff but if it's legit, he'd be the one to smell a rat in Merlo.

https://www.reuters.com/article/us-madoff-langone-sb/langone-says-steered-clear-of-cool-madoff-report-idUSTRE50L0NU20090122
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 01, 2018, 12:05:59 PM
Ken Langone puts his money where his mouth is.

https://finance.yahoo.com/news/ken-langone-americas-worsening-doctor-shortage-serious-national-problem-143650539.html

---

https://www.cnbc.com/2016/10/25/i-dont-see-prosperity-in-the-world-says-billionaire-businessman-ken-langone.html

---

I wish this guy was the Chairman at CVS.
He'd hold Merlo's feet to the fire for sure.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on December 02, 2018, 05:12:22 AM
...
I'm looking further into Merlo, the man, and found the following.
https://moneyinc.com/cvs-health-ceo-larry-j-merlo/
...
For a slightly more in depth, and possibly biased look:
...
https://www.courant.com/business/hc-biz-larry-merlo-ceo-cvs-20171228-story.html
...
Quote
Character assessment is difficult but may be an important variable to consider. The CVS chief certainly deserves a high CEO to average Joe ratio but he does often appear on television.

Apart from whom one partners with, another aspect you may want to consider is to look at the competitive landscape (present and future). I tend to follow this area and a recent video I watched perhaps is worth a listen when you have time. The video features John Doerr, a guy who acknowledges mistakes but also who has had an unusual ability (can't be just luck) to be at the right place and at the right moment.

https://www.cnbc.com/2018/11/29/john-doerr-convinced-amazon-will-roll-out-prime-health.html

The video is not really about a specific Prime healthcare option, it's about all this capital looking for "entrepreneurs" and the huge potential from the "liberation" of all data lying within the "proprietary" models of the established players. If you watch the video, you will find that Mr. Doerr fails to come up with a satisfactory answer in relation to a relatively straighforward question coming from the audience (addiction specialist). However, there is a lot of people with boots on the ground who have actionable ideas that do not involve MinuteClinics and who are looking for capital. Opinion: the bridge between capital and ideas is about to be completed and there will be a lot of failures but the moat around the castle will be challenged, perhaps sooner than you (or Mr. Merlo, who is also featured in the link) think. A potential conclusion at the end of the video is to wonder if any of this information technology stuff is relevant and that may be the biggest risk of all. Take that with a grain of salt since I thought that this Bezos guy did not stand a chance against Barnes and Nobles in the 90's.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 02, 2018, 08:16:23 AM
...
I'm looking further into Merlo, the man, and found the following.
https://moneyinc.com/cvs-health-ceo-larry-j-merlo/
...
For a slightly more in depth, and possibly biased look:
...
https://www.courant.com/business/hc-biz-larry-merlo-ceo-cvs-20171228-story.html
...
Character assessment is difficult but may be an important variable to consider. The CVS chief certainly deserves a high CEO to average Joe ratio but he does often appear on television.

Apart from whom one partners with, another aspect you may want to consider is to look at the competitive landscape (present and future). I tend to follow this area and a recent video I watched perhaps is worth a listen when you have time. The video features John Doerr, a guy who acknowledges mistakes but also who has had an unusual ability (can't be just luck) to be at the right place and at the right moment.

https://www.cnbc.com/2018/11/29/john-doerr-convinced-amazon-will-roll-out-prime-health.html

The video is not really about a specific Prime healthcare option, it's about all this capital looking for "entrepreneurs" and the huge potential from the "liberation" of all data lying within the "proprietary" models of the established players. If you watch the video, you will find that Mr. Doerr fails to come up with a satisfactory answer in relation to a relatively straighforward question coming from the audience (addiction specialist). However, there is a lot of people with boots on the ground who have actionable ideas that do not involve MinuteClinics and who are looking for capital. Opinion: the bridge between capital and ideas is about to be completed and there will be a lot of failures but the moat around the castle will be challenged, perhaps sooner than you (or Mr. Merlo, who is also featured in the link) think. A potential conclusion at the end of the video is to wonder if any of this information technology stuff is relevant and that may be the biggest risk of all. Take that with a grain of salt since I thought that this Bezos guy did not stand a chance against Barnes and Nobles in the 90's.

Provocative.

I'm mostly concerned with preservation of capital and CVS is a gamble for sure.

It's a bet based on the belief that they have the will and ability to deliver value based care, competitively,
and my basis for that belief is not rooted in fact as much as it is in faith, which may make this an iffy wager.

Thanks for taking the time to help!

I'm looking for candidates to trim or close out after the 1st of the year & CVS is on the list along with SoftBank.
(Way too many moving parts with that wild man Masason.)

When I look at everything I own, the only thing I truly understand is my home, which still presents occasional surprise expenses.

At present, valuation is not so important since my home is very utilitarian (and you can't move in with Uncle Warren just because you own BRK)
but valuation could become a concern in another 2 years, depending on where I finish up my degree.
Liquidity, although good due to the location, is not nearly as good as equity markets.

Since I'm liquid enough to meet the next 3 or 4 years expenses, it may be best to turn what I own in the equity markets into real estate.
But then, there's all that extra labor involved in rental ops & maintenance (which can be offloaded to a property manager.)
And the potential that I may leave the area.

I only need to make a small amount of passive income every year to maintain ACA assistance eligibility & this could be done with equities or a rental home.
Both methods have dubious potential and contain many pitfalls but real estate is definitely more tangible & relatable.

A friend & his wife, 2 houses down, do weekly rental of their place on FaceBook & it stays occupied throughout the summer (they visit from GA occasionally.)

I'm considering doing this & renting a place closer to school.
A cheap commercial property, with kitchen & shower facilities would be great.
Not concerned with making money from it, I just need a larger room to work with.

When I really think about it, all the equities I own, including Berkshire, are a leap of faith based on scant knowledge.

Trimming & closing equity positions over the next 2 years sounds like a plan.
Resultant cash will go where it goes, after much consideration, and may
wind up in real estate wherever I go for the last 2 years of a BA.

WTF has all this got to do with whether CVS is an investment or speculation?
Context = Everything, and writing about it shines light on potential paths.

---

I get by with a little help from my friends, on COBF  :)
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 09, 2018, 04:48:58 PM
This sounds great for CVS!!!

https://www.forbes.com/sites/brucejapsen/2018/05/01/aetna-adds-250k-medicare-advantage-enrollees-ahead-of-cvs-deal/#7ec6989a4e64

Yep, sounded great until I Googled "Aetna civil investigative demand (CID)" and came up with this:

https://www.nytimes.com/2017/05/15/business/dealbook/a-whistle-blower-tells-of-health-insurers-bilking-medicare.html

The government pays insurers extra to enroll people with more serious medical problems, to discourage them from cherry-picking healthy people for their Medicare Advantage plans. The higher payments are determined by a complicated risk scoring system, which has nothing to do with the treatments people get from their doctors; rather, it is all about diagnoses.

Diabetes, for example, can raise risk scores by varying amounts, depending on a patientís complications.

...data-mining projects that he had monitored could raise the governmentís payments to UnitedHealth by nearly $3,000 per new diagnosis found. The company, he said, did not bother looking for conditions like high blood pressure, which, though dangerous, do not raise risk scores.

---

and this from Aetna:

http://www.aetnafeds.com/pdf/Fraud_Brochure.pdf

This brochure, which is produced by Aetna, talks about eliminating fraud perpetrated by patients & providers but I find no mention of efforts to eliminate the gaming of Medicare Advantage risk scoring.

---

A potentially large clawback and fines + increased scrutiny and lower revenues from Medicare Advantage could seriously damage the business.

I'm probably making a mistake by not getting out of CVS now but I want to wait until the 1st trading day of 2019.
The proceeds will, more than likely, go into Berkshire.

---

FWIW, this decision is a result of watching an episode of PBS "Playing by the Rules - Taking Advantage"

https://www.pbs.org/video/medicare-advantage-taking-advantage-aldeae/
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on December 09, 2018, 06:11:51 PM
^Similar dynamics were described for Medicaid in replies #125-129 above with the following link:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf

This game of cat and mouse has been going on for a long time. And will continue until it doesn't.
Insurers will continue to explore the grey areas and a very effective way to maximize profits has been to inflate the complexity of enrollees using risk adjustment techniques which take some tweaking with new government programs but that eventually result in "healthy" profits, effectively benefitting from the concept of adverse selection through "upcoding".

Conveniently not mentioned in the references mentioned above is the fact that physicians' own reimbursements may be tied to the diagnostic complexity codes used, thereby aligning the "interests" of providers and payers and reinforcing the creative process leading to risk inflation.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 11, 2018, 08:14:22 AM
^Similar dynamics were described for Medicaid in replies #125-129 above with the following link:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf

This game of cat and mouse has been going on for a long time. And will continue until it doesn't.
Insurers will continue to explore the grey areas and a very effective way to maximize profits has been to inflate the complexity of enrollees using risk adjustment techniques which take some tweaking with new government programs but that eventually result in "healthy" profits, effectively benefitting from the concept of adverse selection through "upcoding".

Conveniently not mentioned in the references mentioned above is the fact that physicians' own reimbursements may be tied to the diagnostic complexity codes used, thereby aligning the "interests" of providers and payers and reinforcing the creative process leading to risk inflation.

Another factor in my decision to get out of CVS is a possible busted thesis with regards to the Minute Clinics.

https://www.forbes.com/sites/brucejapsen/2018/02/23/urgent-care-industry-hits-18b-as-big-players-drive-growth/#2d138d7b4d89

I've noticed multiple urgent care clinics popping up in my area.

They all have advanced treatment & diagnostics (x-rays, broken bones, etc.) which CVS would be hard put to compete with.

Urgent care clinics also seem to have an advantage by being closely tied to hospital labor pools.

CVS would likely have problems staffing up if they decided to offer expanded services which require actual physicians & trained nursing staff.
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on December 11, 2018, 09:31:55 AM
^Similar dynamics were described for Medicaid in replies #125-129 above with the following link:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf

This game of cat and mouse has been going on for a long time. And will continue until it doesn't.
Insurers will continue to explore the grey areas and a very effective way to maximize profits has been to inflate the complexity of enrollees using risk adjustment techniques which take some tweaking with new government programs but that eventually result in "healthy" profits, effectively benefitting from the concept of adverse selection through "upcoding".

Conveniently not mentioned in the references mentioned above is the fact that physicians' own reimbursements may be tied to the diagnostic complexity codes used, thereby aligning the "interests" of providers and payers and reinforcing the creative process leading to risk inflation.

Another factor in my decision to get out of CVS is a possible busted thesis with regards to the Minute Clinics.

https://www.forbes.com/sites/brucejapsen/2018/02/23/urgent-care-industry-hits-18b-as-big-players-drive-growth/#2d138d7b4d89

I've noticed multiple urgent care clinics popping up in my area.

They all have advanced treatment & diagnostics (x-rays, broken bones, etc.) which CVS would be hard put to compete with.

Urgent care clinics also seem to have an advantage by being closely tied to hospital labor pools.

CVS would likely have problems staffing up if they decided to offer expanded services which require actual physicians & trained nursing staff.

I'm not sure this is a direct competitor to CVS.  The urgent care clinics are really playing at taking patients away from hospitals and diagnostic center clinics focused on urgent care (i.e. reducing emergency room visits).  They need to have big equipment and doctors in place to prescribe meds and give diagnoses.  CVS is coming at it from the other end focusing more on wellness at the patient level.  Preventative flu shots, blood pressure etc.  I don't know that the pharmacy locations will ever try and get into diagnostics, x-rays, broken bones etc.  They simply don't have the space for all the big equipment. 

I actually really like these urgent care clinics because they make treatment more accessible and affordable which plays very well into a pharma provider.  Now if the urgent care clinics start putting pharmacies in place it would be more concerning - but that seems more like a partner opportunity than a threat.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on December 11, 2018, 11:55:04 AM
^Similar dynamics were described for Medicaid in replies #125-129 above with the following link:
https://www.whitehouse.gov/wp-content/uploads/2018/03/The-Profitability-of-Health-Insurance-Companies.pdf

This game of cat and mouse has been going on for a long time. And will continue until it doesn't.
Insurers will continue to explore the grey areas and a very effective way to maximize profits has been to inflate the complexity of enrollees using risk adjustment techniques which take some tweaking with new government programs but that eventually result in "healthy" profits, effectively benefitting from the concept of adverse selection through "upcoding".

Conveniently not mentioned in the references mentioned above is the fact that physicians' own reimbursements may be tied to the diagnostic complexity codes used, thereby aligning the "interests" of providers and payers and reinforcing the creative process leading to risk inflation.

Another factor in my decision to get out of CVS is a possible busted thesis with regards to the Minute Clinics.

https://www.forbes.com/sites/brucejapsen/2018/02/23/urgent-care-industry-hits-18b-as-big-players-drive-growth/#2d138d7b4d89

I've noticed multiple urgent care clinics popping up in my area.

They all have advanced treatment & diagnostics (x-rays, broken bones, etc.) which CVS would be hard put to compete with.

Urgent care clinics also seem to have an advantage by being closely tied to hospital labor pools.

CVS would likely have problems staffing up if they decided to offer expanded services which require actual physicians & trained nursing staff.

I'm not sure this is a direct competitor to CVS.  The urgent care clinics are really playing at taking patients away from hospitals and diagnostic center clinics focused on urgent care (i.e. reducing emergency room visits).  They need to have big equipment and doctors in place to prescribe meds and give diagnoses.  CVS is coming at it from the other end focusing more on wellness at the patient level.  Preventative flu shots, blood pressure etc.  I don't know that the pharmacy locations will ever try and get into diagnostics, x-rays, broken bones etc.  They simply don't have the space for all the big equipment. 

I actually really like these urgent care clinics because they make treatment more accessible and affordable which plays very well into a pharma provider.  Now if the urgent care clinics start putting pharmacies in place it would be more concerning - but that seems more like a partner opportunity than a threat.

Good thoughts.

Still, I'm having nagging doubts.

I probably ought to quit staring at it until 31 December & then decide to sell some or all, or do nothing.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on February 22, 2019, 06:14:27 AM
So, what is the thought after CVS calibrated expectations for 2019 downwards? The stock looks cheap with a midrange earnings expectation of $6.78/ share but a lot of key performance indicators (profit/claim, operating margins etc) seem to be in a LT downtrend.

I am tempted to buy cheap durable business like CVS, but I am wary to buy a business in the need to a serious restructuring, since my experience is that they in most cases really cheap anymore when all is said and done.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 22, 2019, 06:51:56 AM
There are bound to be problems with such a large integration.

I probably shouldn't own such a complicated business & the fact that the entire industry is operating in a minefield makes this doubly so.

I believe that the healthcare superstore concept is something that can be used to deploy a lot of capital.
For a great-mediocre-poor return? IDK, it's a leap of faith for me that it'll turn out well.

That dirty word "synergies" seems like a real opportunity.
It's definitely going to be competitive.

"I'm going with my gut." - Bagholder Quote
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on February 22, 2019, 06:17:22 PM
There are bound to be problems with such a large integration.

I probably shouldn't own such a complicated business & the fact that the entire industry is operating in a minefield makes this doubly so.

I believe that the healthcare superstore concept is something that can be used to deploy a lot of capital.
For a great-mediocre-poor return? IDK, it's a leap of faith for me that it'll turn out well.

That dirty word "synergies" seems like a real opportunity.
It's definitely going to be competitive.

"I'm going with my gut." - Bagholder Quote

The problem for CVS in the last quarter wasnít with Aetna, it was with CVS core business (PBM and retail), I donít think that CVS has done much work on integration with the acquired Aetna business yet.

The whole talk itís CVS health care reminds me a bit of the Citicorp financial superstore concept of the 90ís and we all know how this worked out. I actually think that the integrated health care is the future - I have seen it (as a customer ) and itís called Kaiser HMO... I just donít think it will be easy to achieve with acquisitions rather than grow it organically over time.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on February 22, 2019, 06:53:55 PM
There are bound to be problems with such a large integration.

I probably shouldn't own such a complicated business & the fact that the entire industry is operating in a minefield makes this doubly so.

I believe that the healthcare superstore concept is something that can be used to deploy a lot of capital.
For a great-mediocre-poor return? IDK, it's a leap of faith for me that it'll turn out well.

That dirty word "synergies" seems like a real opportunity.
It's definitely going to be competitive.

"I'm going with my gut." - Bagholder Quote

The problem for CVS in the last quarter wasnít with Aetna, it was with CVS core business (PBM and retail), I donít think that CVS has done much work on integration with the acquired Aetna business yet.

The whole talk itís CVS health care reminds me a bit of the Citicorp financial superstore concept of the 90ís and we all know how this worked out. I actually think that the integrated health care is the future - I have seen it (as a customer ) and itís called Kaiser HMO... I just donít think it will be easy to achieve with acquisitions rather than grow it organically over time.
FWIW I am unable to see the synergies with the combination.
IMO high market share in the pharmacy retail segment, slow change and continuing free cash flow generation capacity should make it an average performer (compared to the S&P) at today's price.
Their debt is quite high but probably will not become existential under any economic scenario.

Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 23, 2019, 06:56:26 AM
This is why nobody should ever let me run money for them  :-X
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on February 23, 2019, 08:13:15 AM
The problem for CVS in the last quarter wasnít with Aetna, it was with CVS core business (PBM and retail)

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

I would be interested to see what sort of lift Anthem will give CVS in 2020.

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.
Title: Re: CVS - CVS Health Corporation
Post by: Cigarbutt on February 24, 2019, 05:02:05 AM
This is why nobody should ever let me run money for them  :-X
I plan to let this one slip away from the radar but the industry is interesting and would like to read your thoughts if you hold this one for the long run.

This 2018 reference may be useful:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5973245/
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 24, 2019, 07:33:31 AM
This is why nobody should ever let me run money for them  :-X
I plan to let this one slip away from the radar but the industry is interesting and would like to read your thoughts if you hold this one for the long run.

This 2018 reference may be useful:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5973245/

I go with my gut a lot of the time.
Gut + my version of doo diligence.
The doo stands for doo.
As in doo doo.

I am very appreciative of the time you take to educate me.

I feel like my decisions are going to get better
because I'm paying attention to possible downside
(and stagnation)
instead of just building pie in the sky scenarios.

Sometimes I see things differently.

I saw something in Amerisource-Bergen until the compounding debacle made it obvious to me that management sucks.
I saw something in SoftBank until I realized that it was way too complicated for me to really see anything.

I kind of wish that all I owned was BRK, BBH, CHTR, DIS, DVA, EW, GPC, NVO, VDE
(heavier on the BRK & DIS)
but I'm going to let all the others play out a bit.

Real estate is looking better & better.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on February 24, 2019, 11:15:51 AM
After reviewing CVS a bit, as well as other players in this sector, I would be more comfortable buying WBA than CVS, as I think WBA is better run, has a single focus and much less debt. I donít own the stock yet, but I think it looks interesting, with an ~11x PE (backing out amortization expenses).

I do own some MCK purchased recently and think it is a nice defensive pick, despite the negative headlines from the opioid issue. I also think that there is a chance that these wholesalers (ABC, MCK, CAH) will get bought up, if the trend indeed goes towards integration.


Just from my experiences, it seems that at times, sectors of the health care sector become quite cheap. I recall pharmaceuticals being cheap, health insurers a couple of years ago and now distributors and pharmacies. In all these cases that I recall, the sectors that wer cheap seemed to have come back quite nicely, as Mr. Market seemed to have overestimated the trajectory of change and a reversal to the mean bet would have worked. this may be a similar type of situation where the wholesalers and the pharmacies have become too cheap and will revert to the mean as well.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 24, 2019, 11:35:22 AM
After reviewing CVS a bit, as well as other players in this sector, I would be more comfortable buying WBA than CVS, as I think WBA is better run, has a single focus and much less debt. I donít own the stock yet, but I think it looks interesting, with an ~11x PE (backing out amortization expenses).

I do own some MCK purchased recently and think it is a nice defensive pick, despite the negative headlines from the opioid issue. I also think that there is a chance that these wholesalers (ABC, MCK, CAH) will get bought up, if the trend indeed goes towards integration.


Just from my experiences, it seems that at times, sectors of the health care sector become quite cheap. I recall pharmaceuticals being cheap, health insurers a couple of years ago and now distributors and pharmacies. In all these cases that I recall, the sectors that wer cheap seemed to have come back quite nicely, as Mr. Market seemed to have overestimated the trajectory of change and a reversal to the mean bet would have worked. this may be a similar type of situation where the wholesalers and the pharmacies have become too cheap and will revert to the mean as well.

I've always wanted to own a health insurer but they seem perpetually expensive.

I bought CVS before they announced the Aetna deal.

I got my wish, for better or worse.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on February 28, 2019, 11:17:45 AM
The problem for CVS in the last quarter wasnít with Aetna, it was with CVS core business (PBM and retail)

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

I would be interested to see what sort of lift Anthem will give CVS in 2020.

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.

Looks like the multiples for health care insurers are rapidly coming down. I am really surprised they went for 20x earnings to begin with. UNH trades for 8-10x earnings for a long period of time. Looks like CVS got into this business right at the top. I can see already a KHC sized goodwill write off in the next few years.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on February 28, 2019, 12:45:23 PM
The problem for CVS in the last quarter wasnít with Aetna, it was with CVS core business (PBM and retail)

Both adjusted claims and prescription volumes grew nicely. Both are forecasted to grow next year. So they are selling more units but with worse margins. Whether they can stabilize margins is an open question. They are investing heavily in the health superstore concept, so I would expect continued margin erosion. They are also investing in the Anthem ramp-up.

I would be interested to see what sort of lift Anthem will give CVS in 2020.

The ongoing political pressure on drug pricing and rebates will continue to hurt CVS multiple and revenue.

The integration with Aetna is another x-factor. My guess is that there will be a very large write-down in the next 5 years, but can Aetna grow enough to offset the pricing pressure in pharmacy and PBM?

If they can somehow stabilize the business, this looks like a homerun. UNH trades for 20x. Surely CVS could get up to 12x? But the market obviously believes that the business won't stabilize.

Probably too close to call. Seems like a reasonable bet but the high debt makes this much riskier than it was before the merger.

Looks like the multiples for health care insurers are rapidly coming down. I am really surprised they went for 20x earnings to begin with. UNH trades for 8-10x earnings for a long period of time. Looks like CVS got into this business right at the top. I can see already a KHC sized goodwill write off in the next few years.

yep
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on March 01, 2019, 08:34:11 AM
If I owned CVS and fonít Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in todayís mini crash.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on March 01, 2019, 10:33:41 AM
If I owned CVS and fonít Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in todayís mini crash.

I believe their approach could work.

I also believe what you said about a big write-down in the future.
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on March 01, 2019, 11:32:18 AM
If I owned CVS and fonít Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in todayís mini crash.

I believe their approach could work.

I also believe what you said about a big write-down in the future.

Yes, CVS approach could work, but there is a whole lot more risk both from an execution and balance sheet angle compared to WBA. If you like the retailing side, there is no reason to stick with CVS when you can buy a pure play at a similar valuation ( adjusted by leverage). I always try to isolate a long thesis from its expression.
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on March 01, 2019, 12:45:06 PM
If I owned CVS and fonít Like their integrated health care approach, I would just sell and buy WBA instead. FWIW, I just bought a starter in WBA today in todayís mini crash.

I believe their approach could work.

I also believe what you said about a big write-down in the future.

Yes, CVS approach could work, but there is a whole lot more risk both from an execution and balance sheet angle compared to WBA. If you like the retailing side, there is no reason to stick with CVS when you can buy a pure play at a similar valuation ( adjusted by leverage). I always try to isolate a long thesis from its expression.

WBA is a much better retailer.  And better managed.  CVS gives some protection against things that hit WBA today like rebate pressure because they are now on both sides of that payment.  But the tradeoff for that is huge leverage and the issues that come from the PBM and payer side in an uncertain healthcare market.  From a retail perspective though, having a rational oligopoly in an area that is only going to grow is not a bad thing whichever player you back.
Title: Re: CVS - CVS Health Corporation
Post by: DooDiligence on March 01, 2019, 01:22:55 PM
I agree with both of you & thanks for making your argument against CVS clear to me.

I've been too busy staring at the trees to see the potential for the forest getting clearcut.
Title: Re: CVS - CVS Health Corporation
Post by: Gregmal on March 27, 2019, 05:36:15 AM
This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

My question to those that follow; what do you guys think of management?

Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on March 27, 2019, 08:16:13 AM
This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

My question to those that follow; what do you guys think of management?

I will probably get lambasted for it but I like Merlo.  There are certainly faults (overpaying for acquisitions being the foremost) but I think the very long term vision for CVS's role in the future of healthcare is ahead of most others. They are more diversified and vertically integrated now and while they are not as good at retailing at Walgreens, that is becoming a smaller component of the business.  Given the breadth of the businesses now I think his key role is making sure the people running the 3 businesses are the best out there. Again though, this is an oligopoly right now with huge tailwinds so hopefully it is becoming a business that can overcome weak management even if that's the case.
Title: Re: CVS - CVS Health Corporation
Post by: Gregmal on March 27, 2019, 02:34:24 PM
This has gotten interesting IMO. All that was already discussed here aside, I think potentially having $10B in FCF during their "transition" year is pretty impressive. Shorter term debt maturities aren't overwhelming and should easily be covered by FCF in excess of payout.

My question to those that follow; what do you guys think of management?

I will probably get lambasted for it but I like Merlo.  There are certainly faults (overpaying for acquisitions being the foremost) but I think the very long term vision for CVS's role in the future of healthcare is ahead of most others. They are more diversified and vertically integrated now and while they are not as good at retailing at Walgreens, that is becoming a smaller component of the business.  Given the breadth of the businesses now I think his key role is making sure the people running the 3 businesses are the best out there. Again though, this is an oligopoly right now with huge tailwinds so hopefully it is becoming a business that can overcome weak management even if that's the case.

Thanks. Yea I kind of agree with this. From the outside this kind of seems like a business that is good enough to negate the effects of a less than stellar manager. I'm trying to hunker down and determine whether this outside view is concrete enough to base an investment on it.

I agree WBA is better at the retail end of things but frankly dont think this will be too much of an advantage for too long. There are only so many places where you can charge $2.50 of a 2-liter of soda or 30% more on grab and go products that are much cheaper at other stores or online. So I see that advantage eventually going away. I think CVS decided to give this up when they stopped selling cigarettes.

My ideal scenario is they take this year to smooth things out, pay down some debt, and then just spit out cash like a broken ATM. We will see.
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on April 14, 2019, 02:43:01 PM
https://www.barrons.com/articles/cvs-stock-health-care-51555105435?mod=hp_HERO
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on May 01, 2019, 07:14:45 AM
Fantastic results today.  The cash machine is spitting out dough.  Over $10bn of cash flow projected for this year (a transition year too) on a $70bn market cap. 
Title: Re: CVS - CVS Health Corporation
Post by: Spekulatius on May 16, 2019, 08:02:42 PM
Interesting, the stock price is back to square one (recent lows). The doubt run deep for sure. Bought some.

I like the transformation in the stores I have been seeing. Minute clinics next to entry. Increased the space for the prescription counter / consulting section and trimmed merchandise.
Title: Re: CVS - CVS Health Corporation
Post by: valuedontlie on May 18, 2019, 04:04:29 PM
the cash flow looks appealing on the surface... ~$10bn op cash flow less ~$2.5bn capex = $7.5bn FCF...

isn't there some concern over the degradation of the business here? AET was doing $3.5bn+ op cash flow each year pretty consistently prior to merger and CVS was ~$8bn per year realm... now it's $10bn combined? and this is with part of the synergy goals...
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on May 19, 2019, 06:54:02 AM
Dont forget there is an extra $1bn of interest expense to fund the acquisition, the integration expenses for 2019 and the hit they are taking on the LTC business this year (which, yes, is a degradation of the business).  Management has beenvery explicit that 2019 is a restructuring year.

That's not to underplay your point.  The retail and PBM margins are under pressure and theres always questions about where the payer business is going.  But I like the industry and demographic tailwinds, the oligopoly market, the consolidating payer market and the combined business model.  And most of all the price today
Title: Re: CVS - CVS Health Corporation
Post by: dwy000 on May 22, 2019, 12:15:46 PM
If there's a better source for in depth analysis on drug spend and the channel as a whole (retail pharma, payers, PBM's, etc - and the interplay between them) I've yet to find it.

Great summary today on the spend by PBM's on drugs overall and the breakdown between unit vs. price. 

https://www.drugchannels.net/2019/05/which-pbm-best-managed-drug-spending-in.html#more
Title: Re: CVS - CVS Health Corporation
Post by: KCLarkin on July 11, 2019, 06:06:02 AM
Wow...trump admin cancels plans to eliminate drug rebates:

https://www.cnbc.com/2019/07/11/white-house-pulls-proposal-to-eliminate-drug-rebates-politico.html
Title: Re: CVS - CVS Health Corporation
Post by: Saluki on July 11, 2019, 06:16:44 AM
Wow...trump admin cancels plans to eliminate drug rebates:

https://www.cnbc.com/2019/07/11/white-house-pulls-proposal-to-eliminate-drug-rebates-politico.html

I own some BHC so it should get a nice pop today.  It was unexpected, but I'll take it. 
Title: Re: CVS - CVS Health Corporation
Post by: wolverine890 on August 07, 2019, 09:13:50 AM
After this morning announcement it doesn't seem like the pressures the market thought the company would face are coming to fruition. If CVS earns the midpoint of the new guidance ($6.89-$7.00) the company is trading at ~7.8x adjusted EPS. CFFO was also raised to $10.1-$10.6B. Seemed strong to me and the stock seems cheap.

Pharmacy Service grew by 4.2%, same store sales grew by 4.2%.
Title: Re: CVS - CVS Health Corporation
Post by: Gregmal on August 07, 2019, 09:40:18 AM
Results were again good, if not great(especially relative to the price). I'm beginning to think that one of the major threats here, in Amazon fighting for this business, could abate if nothing else due to the fact that they(AMZN) would be wise to take the foot off the pedal in order to stem regulatory risk.
Title: Re: CVS - CVS Health Corporation
Post by: wolverine890 on August 07, 2019, 09:45:28 AM
Any type of economic contraction would add to AMZN's pressures to expand into new markets.
Title: Re: CVS - CVS Health Corporation
Post by: ander on August 07, 2019, 12:18:01 PM
Any type of economic contraction would add to AMZN's pressures to expand into new markets.

Could you clarify what you mean? I didnít follow.
Title: Re: CVS - CVS Health Corporation
Post by: wolverine890 on August 08, 2019, 09:22:42 AM
Any type of economic contraction would add to AMZN's pressures to expand into new markets.

Could you clarify what you mean? I didnít follow.

Ya, sorry. IMO AMZN, as Greg said, would be wise to "take the foot off the pedal" of expanding into many areas of the economy. My thought was that an economic contraction would help CVS solidify their position and create a decent amount of pressure for AMZN if they choose to continue to compete in this market. Does that make more sense?

I would think an economic downturn would be great for CVS. There business is more or less recession proof. In 08-09 rev grew 12.9% OP grew 6.5%. From 09-10 (the only year in the last decade with negative rev growth), rev fell by only 2.3% & OP fell by 4.3%.
Title: Re: CVS - CVS Health Corporation
Post by: ander on August 08, 2019, 02:25:41 PM
Thx. Makes sense. I agree re: AMZN.
Title: Re: CVS - CVS Health Corporation
Post by: Gregmal on November 25, 2019, 04:47:21 PM
LOL, now after clearing $75, the "activist" finds it attractive.

https://seekingalpha.com/news/3521904-starboard-value-takes-stake-cvs-dow-jones

More evidence the "smart money" just aint so....

I've long believed that the only real "alpha" most of these smart money guys get is through exclusively negotiated deals and private offerings. When it comes to investing in public stuff, the records probably arent much better than that of most retail investors.