CVS Loses Blue Shield of California Contract, Signaling a Potential Industry Shift
Lowering our fair value estimate of CVS stock as its dominance looks likely to decline.
Blue Shield of California has announced that it is dropping CVS Health CVS for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon AMZN and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this looks to us like the first development with any real teeth. This could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna Group CI, and UnitedHealth Group UNH. We do not expect to change our narrow moat ratings for these managed care organizations because of this announcement, though.
We are reducing our fair value estimate for CVS, but keeping our estimates in place for the other MCOs we cover. Our fair value estimate for CVS has gone down to $103 per share from $113, primarily to reflect the loss of this contract, as well as the pending (2024) loss of its contract with Centene and the uncertainty around its role in Elevance Health’s ELV PBM operations in 2025 and beyond.
We have also mildly reduced some of our longer-term profit growth assumptions for the top three PBMs, which contributed to our fair value estimate decrease for CVS. But given the cash flows building in our model for Cigna and the diversity of UnitedHealth’s operations, we are not changing their fair value estimates. While Elevance and Humana HUM have exposure to the PBM business, we do not believe this announcement warrants a change in their fair value estimates. Centene should also not be affected, given its lack of PBM operations.
Overall, CVS’ dominance of the PBM business looks likely to decline materially in the near future with this and its other contract losses, which creates another hurdle to its ambitions for double-digit earnings growth. We suspect such growth is only now possible, in the middle of our 10-year forecast period, with significant capital allocation contributions, such as from share repurchases.
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