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Through its UnitedHealthcare and Optum arms, UnitedHealth Group provides medical benefits to people in all 50 U.S. states and more than 150 other countries
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👨⚕️ CVS: Dodging Competition?
CVS Health (CVS) wants to own or partner with a primary-care company. The second-largest healthcare company in the US intends to have a deal by the end of the year. However, competition has marched significantly ahead within this space. Can it manage to play catch-up?
Expanding Avenues
CVS wants to become the leading health solutions company in the US. It provides health services through three segments - healthcare, pharmacy, and retail / LTC, including its walk-in medical clinics. Along with the 10K stores that it operates across the country, CVS also owns insurer Aetna and pharmacy benefits manager CVS Caremark. It also provides patient care through MinuteClinics inside its stores.
More than 37M Americans have kidney disease, costing Medicare $35B annually. Over 700K patients have ESRD; of those, over 500K are on active dialysis.
Last week, the company forayed into the home kidney care industry by announcing its new home dialysis system clinical trials. The early initiatives are to prioritize early diagnosis of the disease and expand home dialysis as they can be more frequent and prolonged than in-center ones.
The company also introduced the CarePass program nationwide in 2019. The loyalty and membership program offers free one-or two-day shipping, discounts, and other perks for a monthly fee of $5 or $48 annually. CarePass membership increased 26% from last year in Q2.
Both trips to CVS and the average basket size of customers increased in mid-single digits in Q2. The increase benefitted the company’s earnings which beat analyst expectations.
Key Highlights From Q2:
Revenue: $80.64B Vs $76.37B expected
Earnings Per Share: $2.40 Vs $2.17 expected
Net Profit: $2.95B Vs $2.78B Year-on-Year
The management attributed the growth to the company’s strategy of adding more health services, which also deepened customer relationships. Visits to the MinuteClinic increased 12% during the quarter.
Same-store sales during the quarter increased 8%, defying expectations of a 0.3% drop. Customers bought more at-home Covid test kits and cough, cold & flu medications. Part of the 11% revenue growth also came from price hikes as the company passed most inflation-related costs to shoppers.
When questioned about further hikes, the management refused to provide more clarity but said that they want to ensure there is value for shoppers on the shelf at all times. On average, private labels at CVS are 20-40% cheaper than national brands, providing a budget-friendly option to customers.
Falling Behind Competition
While growth for home Covid tests increased during the quarter, CVS witnessed a decline in the number of tests and vaccines administered. 4M Covid tests and ~6M vaccines were given during the quarter, down from the 6M tests and 8M shots in Q1 and over 20M shots in Q4 2021. However, it raised its annual vaccine forecast to 20M, indicating robust demand for booster shots. It now expects covid-related yearly revenue of $3B, down a third from last year but better than the earlier forecast of a two-thirds slump.
CVS expects to grow more than anticipated as they raised their annual guidance.
Updated Guidance For 2022:
Revenue Growth: 5-7% Vs 5-6% earlier
Operating Income: 0-2% Growth Vs 0-2% Drop
Adjusted EPS: 0-2% Growth Vs 0-2% Drop
CVS customers can get vaccines or urgent care at MinuteClinic outposts inside its stores. It has also introduced therapy for mental health at some of its stores. However, the company does not have doctor offices where patients can go for annual checkups or have appointments with physicians or nurses. It wants to change this by either buying or acquiring a stake in a primary-care company by the year-end.
A company with a strong management team, a tech background, and the ability to grow quickly is on CVS’ radar. As part of the plan, it is bidding for Signify Health Inc, which is exploring strategic alternatives, including a sale. In addition, CVS may face competition from other managed-care providers and PE firms who also plan on putting in their respective bids.
Signify uses analytics and technology to help health plans, employers, physician groups, and health systems with in-home care. It went public in February 2021 and currently trades below its IPO price of $24. The company announced winding down one of its units last month to focus on more profitable businesses.
CVS’ competition has already made significant moves in the home healthcare market. Walgreens is already opening hundreds of doctor offices in partnership with VillageMD. Walmart also has a small but growing number of clinics where people can visit a doctor, dentist, or therapist at lower prices. Amazon has also entered the fray with a $3.9B acquisition of One Medical, which gives it access to 188 medical offices across 25 markets. CVS was also the mystery bidder for One Medical before Amazon swooped in.
The management, though, is unfazed with competition and their moves. CEO Karen Lynch believes CVS has a competitive edge simply due to the size of its business. Lynch explained this on the analyst call stating that 4.8M customers interact with the company daily at its locations.
CVS will need to look for other growth areas as the Covid business tapers off. The stock is flat this year compared to an overall fall in the broader market. The company will have to quickly find ways of dodging competition, which is running away with the first-mover advantage if it intends to keep its shareholders in the pink of health!
Market Reaction
CVS ended at $104.05, up 0.35%.
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