CVS Crashed On Guidance, But Leerink Remains Bullish

• CVS Health Corp (NYSE: CVS) has seen a 12.17 percent decline in its share price over the last three months, with a low of $95.12 on September 29.
• Leerink’s David Larsen has maintained an Outperform rating on the company, with a price target of $125.
• The stock saw a pullback following the lower than consensus 2016 guidance issued by the company on October 30, although Larsen believes that CVS Health did the right thing by “reining in expectations.”

Analyst David Larsen mentioned, “CVS' PBM is experiencing rapid growth with ~$11B of net new wins heading into 2016, and it takes time to implement Maintenance Choice and other tighter formulary management design programs to (1) squeeze margin for the PBM itself and (2) push volumes to the CVS stores.”

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Larsen believes that other key drivers in the arena remain intact, and that there does not appear to be any major change or shift in the industry that could lead to rapid deceleration in the company’s earnings growth rate.

According to the Leerink report, 2016 is expected to be “a good generic launch year,” without “any major earnings headwinds tied to changes in generic inflation rates, or a slow-down in brand inflation.”

In fact, Larsen expects the slower generic inflation would act as a tailwind for retail stores and that the company would “continue to drive competition in the market in an effort to reduce overall drug trend for its clients,” including the “aggressive management” of specialty drugs.

“CVS has embraced the ACA and believe will continue to evolve and grow in ways that are more B-to-C friendly and account for the incremental cost-burden being placed on the shoulders of the individual consumer,” Larsen added.