On September 20, 2024, the Federal Trade Commission (FTC) filed a lawsuit against CVS Health's Caremark Rx, alongside Cigna's Express Scripts and UnitedHealth's Optum Rx. The lawsuit accuses these pharmacy benefit managers (PBMs) of engaging in illegal rebate programs that have driven up the prices of insulin and other prescription medications.
According to the FTC, these PBMs accepted money from drugmakers in exchange for keeping lower-cost insulin and other drugs off their approved lists, favoring versions with higher upfront prices and bigger rebate payments.
This practice has reportedly led to a significant increase in costs for patients. For example, the list price of the common insulin drug Humalog rose by 1,200% between 1999 and 2017, as reported by the American Diabetes Association.
Impact on CVS Health Stock
Following the announcement of the FTC lawsuit, CVS Health's stock experienced a notable decline. On the day of the announcement, CVS Health's stock fell by 1.8% by 12:58 PM. This reaction is part of a broader trend where the stocks of all three companies involved (CVS Health, Cigna, and UnitedHealth Group) have been negatively affected by the news.
According to Nasdaq, CVS Health, Cigna, and UnitedHealth Group stocks fell after the FTC lawsuit announcement, highlighting the market's concern over the potential implications of this legal action.
Defensive Stance by CVS Health
CVS Health and the other defendants have defended their practices, arguing that they protect Americans from rising drug costs. CVS Health stated that its members already pay less than $25 for insulin on average and blamed drugmakers for the rising prices. The company also claimed that it negotiated discounts to lower costs for its members, as reported by CVS Health's official statement.
Cigna's Chief Legal Officer, Andrea Nelson, described the FTC's lawsuit as part of a "troubling pattern" of "unsubstantiated and ideologically driven attacks" on PBMs. She expressed skepticism about the FTC's chances of success in the lawsuit, as noted in Cigna's press release.
Broader Context and Investor Considerations
The lawsuit is part of an ongoing conflict between the FTC and the PBM industry, with the FTC under Chair Lina Khan having spent years investigating these practices. Lawmakers from both parties have also called for greater transparency and potential new laws to regulate PBM practices, which could be voted on in the lame-duck session after the US presidential election, as reported by Congress.gov.
For investors, it is crucial to consider the potential long-term implications of this lawsuit. If the FTC succeeds, it could lead to changes in how PBMs operate, potentially reducing their revenue streams. In the second quarter of 2024, CVS Health's health services segment, which includes its PBM unit, generated roughly 46% of its total revenue, according to their quarterly financial report. Any negative financial impact from the lawsuit could be significant.
Performance and Risk Analysis
When analyzing CVS Health's stock performance over the past year, it is evident that the company has faced significant challenges. According to data from Zacks, CVS Health has been one of the most searched stocks despite its struggles. Over the past 12 months, CVS Health has seen a return of -15.17%, whereas its benchmark index, the S&P 500, has experienced a return of 34.07%. This stark contrast highlights the difficulties CVS Health has encountered.
The company's risk profile also presents concerns for investors. With a one-year Sharpe ratio of -0.68 compared to the S&P 500's Sharpe ratio of 2.29, CVS Health's risk-adjusted returns are significantly lower than those of its benchmark. This indicates that investors are not being adequately compensated for the risk they are taking on by holding CVS Health stock, as calculated using data from Yahoo Finance.
Conclusion
Investors should be aware of the multiple challenges facing CVS Health, including the FTC lawsuit and the class action lawsuit. The FTC's allegations of price gouging and anti-competitive practices could lead to significant regulatory changes and financial impacts. Understanding these developments is crucial for making informed investment decisions.
The interconnected impacts of these legal battles and regulatory scrutiny on CVS Health's stock performance cannot be ignored. With a declining stock performance and increased risk profile compared to its benchmark, investors must weigh these factors carefully before making any investment decisions regarding CVS Health.
This document was created by Daizy using institutional-grade data and in collaboration with several external Large Language Models. All calculations were performed by the Daizy LLM Analytics Service. The contents of this document do not constitute investment, tax, or legal advice, and Daizy (Vesti.ai Ltd) is not authorized to give any advice. [Please refer to our terms of use.]
