Exploring CVS' Health Services Segment: A Key Growth Engine for 2025?

CVS Health's Health Services segment, which includes CVS Caremark, saw an 8% year-over-year revenue increase in the last quarter, driven by specialty pharmacy growth and drug pricing, though partially offset by client price improvements. Caremark will list Novo Nordisk's Wegovy as its preferred GLP-1 medicine starting July 1st, and CVS will serve as the first retail pharmacy in Novo Nordisk's NovoCare network, increasing Wegovy access. Despite a $247 million loss from exiting the ACO REACH program, analysts remain bullish, projecting a 4.6% revenue increase for the segment in 2024; CVS shares have surged 49.4% year-to-date.

Analysis

CVS Health's Health Services segment demonstrated robust growth in its last reported quarter, with revenues increasing 8% year-over-year to over $43 billion, primarily fueled by advancements in specialty pharmacy, higher pricing of branded medications, and favorable pharmacy drug mix, although partially tempered by price improvements for pharmacy clients. A significant strategic development is CVS Caremark's decision to list Novo Nordisk's Wegovy as the preferred GLP-1 medicine on its largest commercial formularies starting July 1, coupled with CVS becoming the first retail pharmacy in Novo Nordisk's NovoCare network, substantially broadening Wegovy access across 9,000 locations. This initiative complements the success of its Cordavis subsidiary, which now leads the U.S. market with its low-cost Humira biosimilar. Despite these strengths and processing over $464 million in pharmacy claims on a 30-day equivalent basis in the first quarter with membership nearing 88 million, challenges persist. The company incurred a $247 million loss in the first quarter from exiting the ACO REACH program and selling its MSSP business. Furthermore, while the healthcare delivery business, including Oak Street Health and Signify Health, shows growth, persistently elevated Medicare Advantage utilization remains a concern for Oak Street Health's expansion. Nevertheless, analysts project a 4.6% increase in Health Services revenues for 2024. CVS Health shares have significantly outperformed the industry, surging 49.4% year-to-date, and the stock trades at an attractive forward 12-month price-to-sales ratio of 0.22X compared to the industry average of 0.41X, supported by a Value Score of A and upward trending consensus earnings estimates for 2025.

Key Decisions for Investors

• Given the Health Services segment's strong revenue growth, strategic partnerships like the Novo Nordisk Wegovy deal, successful biosimilar strategy, and favorable valuation metrics, investors could consider the current Zacks Rank #2 (Buy) as supportive of a positive outlook.
• It is prudent to monitor the performance of Oak Street Health, particularly the impact of Medicare Advantage headwinds, and the successful execution of the Wegovy distribution strategy to ensure these factors contribute positively to future earnings.
• While the significant year-to-date stock appreciation of 49.4% reflects strong market confidence, investors should assess the sustainability of this momentum and consider the attractive valuation as an opportunity, balanced against potential market corrections or the need for continued strong execution to drive further gains.