CVS Health Drives Drug Affordability by Promoting Competition

CVS Health's Caremark PBM unit is demonstrating robust market positioning, maintaining near 90% retention for the 2026 selling season and securing a five-year contract to service 587,000 CalPERS members starting January 2026. The company is actively driving drug affordability, notably by preferring Wegovy on its formulary to achieve an estimated 10-15% savings in anti-obesity medications and by promoting Humira biosimilars, which have saved clients over $1 billion. This strategic positioning and operational strength have contributed to CVS shares surging 67.4% year-to-date, trading at a forward P/E of 10.87X, below the industry average.

Analysis

CVS Health's Pharmacy Benefit Manager (PBM) unit, Caremark, is demonstrating significant operational strength and market leverage. The unit is tracking towards its historical upper 90% retention rate in the 2026 PBM selling season and has secured a substantial five-year contract with CalPERS, adding approximately 587,000 members effective January 2026. This underscores Caremark's competitive positioning. Strategically, CVS is actively managing drug costs, exemplified by its recent formulary decision to prefer Novo Nordisk's Wegovy over Eli Lilly's Zepbound, a move projected to generate 10-15% savings in the anti-obesity drug category for its clients. This follows a successful precedent where shifting to Humira biosimilars saved clients over $1 billion, proving the efficacy of its formulary management strategy. This strong execution is reflected in the market, with CVS shares having surged 67.4% year-to-date, starkly outperforming the industry's 1% decline. Despite this run-up, the stock trades at a forward five-year P/E of 10.87X, a notable discount to the industry average of 15.05X, and carries a "Value Score of A", suggesting that the market may not have fully priced in its strategic wins.

Key Decisions for Investors

• Investors should view CVS Caremark's aggressive formulary management, including the preferment of Wegovy and adoption of biosimilars, as a core pillar of its competitive advantage that drives both client savings and high retention rates.
• Despite the stock's significant 67.4% year-to-date appreciation, its valuation at a forward P/E of 10.87X remains below the industry average, presenting a potentially attractive entry or accumulation point for value-oriented investors who are bullish on the PBM's continued execution.
• The direct formulary exclusion of Eli Lilly's Zepbound in favor of Novo Nordisk's Wegovy creates a material headwind for LLY and a tailwind for NVO, warranting a review of positions within the GLP-1 and weight-management drug market.
• Monitor the successful integration of the CalPERS contract and the realization of projected cost savings, as these are key catalysts that will be critical for sustaining the company's performance momentum and justifying a potential valuation re-rating.