In the streets of the United States, from time to time you can see a striking red pharmacy sign, where people can not only buy medicine but also daily necessities. Yes, that's the household name of Syvis Health (NYSE:CVS). This issue of opportunity mining will take you to talk about CVS's business model and future opportunities.

What exactly does CVS sell?

To analyze a company still needs to start from its business. CVS is a diversified health solutions company with primary business units including healthcare benefits, pharmacy services, retail/long-term care.

• Health care benefits: Provides health insurance products and related services, including Medicaid, pharmacy, dental, and Medicare Advantage.

• Pharmacy Services: Provides clinical and disease management services, pharmaceutical benefit management (PBM) solutions, and more.

• Retail/Long Term Care: Sale of prescription drugs, a variety of health products, and daily necessities; CVS provides healthcare services such as medical diagnostic testing, vaccination, long-term care, etc. through the acquisition of the minutes Clinic.

Most people have the experience of buying medicine or shopping in CVS, right? Although it is a pharmacy, more people use it as a convenience store 24 hours a day.

Yes, to say the biggest feature of CVS stores, is that it sells both medicines and daily necessities. People go to pharmacies is often a convenient, buy medicine, by the way can also stroll around the supermarket. Or when visiting the supermarket, I bought the usual medicine that you need at home. It can be said that CVS combines medical service operations and retail pharmacies into one of its competitive advantages.

Competitive landscape: how CVS makes money?

1. PBM Department Compressed Costs

As a well-known health care company in the United States, one of the key businesses of CVS is Drug Benefit Management (PBM).

Friends who are not familiar with the word may ask, what is drug welfare management?

In short, drug benefit managers act as intermediaries between pharmaceutical companies, insurers, and pharmacies who negotiate discounts with pharmaceuticals, insurers and pharmacies to reduce drug costs. PBM market concentration is highly concentrated, basically belong to oligopoly competition, which, CVS subsidiary Caremark is the one with the highest market share.

As an industry “boss”, how does CVS make money?

First of all, insurance companies play an important role in the PBM business. From the perspective of CVS, how can we maximize profits in the insurance direction? That might be owning an insurance company!

Therefore, we saw a consolidation of CVS with insurance giant Aetna in 2018, which means that CVS not only reduced costs with Aetna's Medicare Advantage Plan, but also access to all of its competitors' pricing data with Aetna. Ultimately, CVS takes advantage of data to further compress costs, taking profit from every aspect.

As a retail pharmacy, CVS has no need to worry about in this regard, so what about pharmaceutical manufacturers? Also, in the oligarchs pattern, CVS's market share lead makes it capable of negotiating with pharmaceutical manufacturers, so it can profit by saving a percentage of costs through the bargaining ability.

According to Trefis's analysis, the proportion of PBM business will continue to increase year by year, making up the most important part of CVS's overall revenue.

1. Retail pharmacies all over the United States

CVS is undoubtedly the largest pharmacy chain in the United States, with a total of 9,551 CVS pharmacy sites in the United States as of July 2023, covering 52 states and regions. According to statistics, the intensity of CVS pharmacies in 2017's heyday was “there is a CVS within 10 miles of eight of 10 Americans.”

For CVS, store expansion means that customers don't need to visit competitors, maximizing the company's reach and customer base in the healthcare and retail drug markets. This is also the main purpose of their market penetration strategy.

In addition, when physical retail is increasingly difficult in the digital economy, CVS's combination of physical store and online sales business model allows it to survive against the trend. CVS combines traditional pharmacies and e-commerce websites, a business model that has the advantage of maximizing market coverage. CVS improves CVS's competitive advantage and operational efficiency by providing convenient services to consumers through an online approach.

Stock Price Review: The Dilemma of CVS in 2023

According to research by The Motley Fool analysts, CVS's Medicare Advantage division rating dropped from 4 to 3.5 stars for 10 years at the end of 2022. As companies shift to medical services in recent years, things that affect health insurance payments will have a growing impact on CVS profits.

CVS Caremark then failed to bid for a $35 billion PBM contract in 2024, partly due to the rating decline mentioned above. CVS management also said that the impact of losing PBM contracts would result in $2 billion in losses in 2024.

In addition to that, Financhill analysis pointed out that CVS had problems with staffing due to the lack of skilled workforce. In response, the company cut pharmacy hours for about two-thirds of stores.

Some of the above reasons, perhaps when the market is a technical bull market CVS share price downside “culprit.”

Future Opportunities and Risks

Bloomberg analysts noted that the plan to achieve double-digit earnings per share had to be postponed again due to the high cost of healthcare in the Medicare Advantage division until 2024, and withdrew targets for 2024 and 2025 in the second quarter earnings report of 2023.

While high costs add to the difficulties of “losing Centene contracts” and “falling Medicare star ratings”, CVS did not sit still. CVS completed two key acquisitions in 2023 — the March acquisition of Signify Health and Oak Street in May. Among them, Oak Street, acquired for $10.6 billion, is focused on the field of health insurance advantages, with multiple advantages such as scale effects and technology-oriented. CVS hopes to provide healthcare solutions more broadly in the future with the latest acquisition, but realizing the full value of the deal takes time to prove.

The Motley Fool analysts believe that it is not unexpected to see CVS stingy with large transactions to help their transformation. Because CVS has strong free cash flow, typically over $10 billion a year. After subtracting approximately $3 billion in dividends, CVS still has room to use a portion of its cash to fund more acquisitions, a key part of its growth strategy. Five years later, more acquisitions are expected from CVS, so investors should not expect their growth to slow down soon.

One thing to note, however, is that the share price of CVS dividends has only risen 45% over the past decade, compared with the S&P 500 up 228% in the same time frame.