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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.

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CVS Health Corp
(CVS)

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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