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What Will an Unexpected Revenue Boost Mean for This Leading Pharmacy Stock's Bottom Line?

Over the past couple of years, pharmacies have been gravitating toward a core model that provides healthcare services as well as traditional retail offerings. This was recently exhibited by Walgreens Boots Alliance's move to invest $1 billion over four years in building out co-located pharmacy-clinics. Prior to that, we saw CVS Health (NYSE: CVS) acquire Aetna, which had long been known for its medical healthcare management through its insurance services.

With the announcement of its Aetna acquisition, CVS moved closer to its goal of becoming a (self-proclaimed) "premier health innovation company." Now, as the company continues to expand, one competitor is basically handing it a pile of patients and prescriptions. But can this turn into a boost for CVS's bottom line?

Pharmacy technician discussing product with a customer.

Image source: Getty Images.

The good and bad

In early July, Intermountain Healthcare of Nevada announced it would shutter the doors to 25 of its retail pharmacy locations, deemed to be low volume pharmacies. The good news for Intermountain customers is that their prescriptions and medical information will be transferred to the local CVS Health pharmacy; this is expected to happen in August. The good news for CVS is that this move will bring it a new set of customers and patients, which in turn will add additional unanticipated, albeit localized, revenue.

However, there's a flip side to each of these points. In CVS's case, these new customers are unlikely to provide much of a boost to the bottom line, because the 25 pharmacies in question are low-volume retail locations. And as for the patients, their prescriptions and medical information will, as mentioned, be handed to CVS -- which is less of a good thing when you realize that a data breach CVS experienced earlier this year jeopardized 1 billion of its user records. This information included user IDs, medical search information, and email addresses. Fortunately, the company claims that no harm came to its customers or customer data. But this might certainly give caution to new customers and patients who find their way to CVS from Intermountain.

This move by Intermountain could be an example of an emerging trend. As companies change strategies in the wake of the COVID-19 pandemic, experts see consolidation taking place in the form of mergers and acquisitions across healthcare companies. Those that could not withstand the financial blows of the pandemic will ultimately be gobbled up by larger players.

The transitions are already beginning in some places, with Walgreens teaming up with VillageMD to build out one-stop pharmacy-clinic shops and MinuteClinics becoming ever more entrenched within CVS locations. We're also seeing hospitals making moves to embrace in-house pharmacies. According to the Drug Channels Institute, 26% of hospitals owned a specialty pharmacy in 2019, compared with 20% in 2018 and less than 9% in 2015. In larger hospitals -- those with at least 600 hospital beds -- that number skyrockets to 89% with an in-house specialty pharmacy.

The bottom line

CVS is the clear leader among retail pharmacies, with 24.8% of the prescription drug market share in 2020, while Walgreens is not far behind at 19%. As consolidation continues, we can expect more scenarios like the one involving Intermountain and CVS, in which pharmacy chains that include healthcare services pick up new customers and prescriptions from those looking to close retail locations. That said, I don't see a low-volume set of pharmacies providing enough of a boost to a mega-chain's bottom line for investors to get extra excited.

But for long-term investors keeping an eye on the healthcare market, and retail pharmacies in particular, CVS is worth a look. It's coming off of an excellent first quarter in which it increased revenue on a year-over-year basis by 3.5% while providing investors an earnings-per-share increase of 6.8% year over year. Looking toward the remainder of 2021, the company provided 2% raised guidance, resulting in a revised guidance for full-year earnings of $7.62 per share at the midpoint of the range.

This revised guidance -- and a current stock price ($81) sitting at a 17% discount to the average analyst price target of $95 -- could give investors something to really get excited about, regardless of what Intermountain's effects may be.

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Jeff Little has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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