MORGAN STANLEY: Here's how CVS can fend off Amazon


Don’t go head-to-head with Amazon.

That’s the message Morgan Stanley analyst Ricky Goldwasser has for CVS, which is reportedly in talks to buy Aetna in a deal that could help protect its business from the entry of the tech giant in to the healthcare space.

Goldwasser said that CVS’ strength is its vertical integration. CVS has made a number of acquisitions over the past decade, such as Caremark RX, a pharmacy benefits manager, Omnicare, a leading pharmacy services provider and Target’s pharmacy and retail clinic businesses. That push puts the company on a better footing to engage consumers, improve access to care, and deliver cost savings, he said.

Goldwasser said however that any plans to go head-to-head with Amazon in next-day or same-day delivery service of prescriptions may impact the company’s front-store sales. CVS already offers this service and plans to expand it to all of its locations in 2018. It is also considering a mail-order partnership.

CVS has dismissed investors’ concerns about the impact of store traffic in the 16% of stores that offer a delivery service. The company assured investors in its thirdquarter earnings call that Amazon would need a unique offering of prescription delivery services in order to seriously compete in the space, Goldwasser said.

The next catalyst for upside earnings growth could be an announcement on the rumoured Aetna deal, which could then be integrated into its existing services, Goldwasser notes.

“Longer term we think vertical integration with a health plan will develop into a new delivery of care model that drives traffic and improve stickiness’ against an Amazon offering,” Goldwasser wrote in a note.

CVS stock is trading flat at $US68.89. It is down 14.23% for the year.

To read more about what Amazon’s entry into the prescription drugs business means for CVS and Walgreens, click here.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.