Biosimilars have been gaining traction lately as healthcare costs continue to rise. Biosimilars are attractive for healthcare companies as they can vie for a more significant share of the pie, given the extensive market for critical life-saving drugs. Fortune Business Insights expects the U.S. biosimilars market size to grow at a CAGR of 40.2% to reach $100.75 billion by 2029.
CVS Health Corporation (CVS) has jumped on the biosimilar bandwagon by launching a wholly-owned subsidiary named Cordavis, which will work directly with manufacturers to commercialize and/or co-produce biosimilar products. A biosimilar is a biologic medication highly similar to a biologic medication already approved by the U.S. Food and Drug Administration (FDA) – the original biologic (also called the reference product).
Biosimilars are considered safe and effective as they are made from the same types of resources and do not have any meaningful differences from the reference product. Cordavis will not undertake any research and development of drugs. Cordavis has contracted with Novartis AG’s (NVS) Sandoz to commercialize and co-manufacture Hyrimoz, a biosimilar for Humira, during the first quarter of fiscal 2024, under a Cordavis private level.
The list price of this biosimilar to be brought by Cordavis will be more than 80% lower than the current list price of Humira. CVS’ CFO Shawn Guertin said, “Cordavis is a logical evolution for us and will help ensure sufficient supply of biosimilars in the U.S. and support this market now and in the future, while ultimately improving health outcomes and reducing costs for consumers.”
CVS’ Chief Pharmacy Officer and Co-President of the Pharmacy and Consumer Wellness segment, Prem Shah, said, “We have a strategy to go after the products where we believe we can create the most value for customers, and for the US marketplace where we can increase the competition, lower the cost, and get that cost to consumers, and get these products to consumers at lower prices.”
JPMorgan analyst Lisa Gill said the contract with Sandoz is a volume-based transaction with only upside for CVS. In a note, she stated, “CVS has committed to purchasing a certain amount of volume from Sandoz, and management noted there are no additional capital commitments. CVS anticipates Cordavis will generate positive margins for commercializing the product, but it is too early to size the potential contribution.”
With sales of Humira totaling more than $21 billion last year, CVS now can grab a slice of this enormous market for the expensive and vital drug.
Here’s what could influence CVS’ performance in the upcoming months:
Mixed Financials
CVS’ total revenues for the second quarter ended June 30, 2023, increased 10.3% year-over-year to $88.92 billion. For the six months ended June 30, 2023, its net cash provided by operating activities increased 48.2% over the prior-year quarter to $13.35 billion.
Its adjusted operating income declined 10.4% year-over-year to $4.48 billion. The company’s adjusted income attributable to CVS Health declined 14.7% year-over-year to $2.85 billion. Also, its adjusted EPS came in at $2.21, representing a decline of 12.6% year-over-year.
Mixed Analyst Estimates
Analysts expect CVS’ EPS for fiscal 2023 to decline 1.2% year-over-year to $8.59. Its fiscal 2023 revenue is expected to increase 8.9% year-over-year to $351.01 billion. Its EPS for fiscal 2024 is expected to increase 1.2% year-over-year to $8.69. On the other hand, its fiscal 2024 revenue is expected to decline 2% year-over-year to $344.07 billion.
Discounted Valuation
In terms of forward EV/Sales, CVS’ 0.43x is 87.8% lower than the 3.51x industry average. Its 7.54x forward EV/EBITDA is 42.3% lower than the 13.08x industry average. Likewise, its 8.57x forward EV/EBIT is 49.2% lower than the 16.86x industry average.
Mixed Profitability
In terms of the trailing-12-month levered FCF margin, CVS’ 5.33% is significantly higher than the 0.22% industry average. Likewise, its 1.41x trailing-12-month asset turnover ratio is 273.4% higher than the industry average of 0.38x. Furthermore, its 5.42% trailing-12-month EBITDA margin is 5.2% higher than the industry average of 5.15%.
On the other hand, CVS’ 0.84% trailing-12-month Capex/Sales is 81.4% lower than the 4.52% industry average. Likewise, its 15.64% trailing-12-month gross profit margin is 71.8% lower than the 55.53% industry average.
Bottom Line
CVS’ entry into the world of biosimilar products through its newly launched subsidiary Cordavis is expected to help the company boost its revenues and improve its profit margins. However, the company faces competition from other companies making a biosimilar of Humira.
Moreover, the company has yet to communicate what it intends to do after launching the Humira biosimilar during the first quarter of fiscal 2024. Until the company shares its plans, it could be risky to invest in the stock.
Given its mixed fundamentals and profitability, it could be wise to wait for a better entry into the stock.
