CVS Earnings: Strong Performance Driven by Acquisitions and Growth In Specialty Business

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Leading U.S. pharmacy services provider in the , CVS Health (NYSE:CVS) reported its Q4 2015 earnings on February 9th. The company closed its fiscal 2015 on a strong note, driven by its acquisition of the pharmacy businesses within Target and Omnicare. Target’s pharmacy, spread throughout its retail chain, is a sizable addition to CVS’ core business.  On the other hand, Omnicare is the leading pharmacy benefits manager serving the long-term care (LTC) facility sector and augments its services business.  For full year 2015, CVS revenue and diluted earnings per share increased by 10% and 17%, respectively, to $153 billion and $4.63. Backed by the recent acquisitions, the company is confident of accelerating its growth momentum in fiscal 2016 (guidance provided below)

Quick Snapshot of Q4 2015 Earnings

At $41.1 billion, CVS’ Q4 2015 net revenues increased 11% year on year. Revenues in the Pharmacy Services segment increased 11.1% year on year to $26.5 billion, primarily driven by the growth in the specialty pharmacy (which includes the impact of Omnicare) and pharmacy network claims. CVS’s Retail segment also showed continued growth with revenues increasing 12.5% year on year, to $19.9 billion. Close to half the increase in the Retail segment was driven by the addition of Long-term care (LTC) operations acquired as part of the Omnicare acquisition. CVS’s adjusted earnings per share (EPS) for the quarter of $1.53 saw a 26.5% increase compared to Q4 2014. In Q4 2015, the company opened 53 new stores and for the full year opened 130 new net stores in addition to the acquired pharmacies. (Read Press Release)

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View our detailed analysis for CVS Health

Acquisitions To Drive Growth In 2016

In August 2015 CVS acquired Pharmacy services provider Omnicare for about $10 billion, followed by the acquisition of Target’s pharmacies for $1.9 billion in December 2015.

Omnicare helps strengthen CVS’s position in the Retail/LTC segment as well as the specialty pharmacy market. The acquisition of Omnicare boosted the revenue growth of the company in the latter half of fiscal 2015 and equipped CVS with a new pharmacy dispensing channel, enhancing its ability to provide the continuity of care for patients as they transition through the healthcare system. Additionally, Omnicare’s complementary specialty pharmacy platform and clinical expertise augmented CVS’ capabilities in the specialty segment, which is already an important growth driver for CVS. (More details provided below)

The acquisition of Target’s more than 1,600 pharmacy departments and 80 medical clinics makes CVS’ network of pharmacies the largest among its competitors. Prior to the acquisition CVS had close to 7,900 pharmacy stores. Not only does the acquisition increase CVS’ share of the total prescriptions filled in the U.S., by enabling the company to expand its retail presence in new markets, but it should yield additional benefits in the form of lower drug acquisition costs, leading to better EBITDA margins. CVS boosted its market share in the retail pharmacy market to 21.6% from 21.0% in 2014.

Both acquisitions were carried out successfully and the integration is well underway. With Omnicare integration almost complete, Target’s pharmacies are being rebranded under CVS and the process is expected to complete by fiscal 2016.

Specialty Pharmacy Services Continues To Be A Strong Growth Driver

CVS’s specialty segment continued to grow faster than the market, with revenues in the Pharmacy services segment increasing by 11.1% in Q4 2015. The growth in specialty was driven by increased claims due to new products, new clients, and the gain of 11% in Specialty Connect. Partially offsetting this growth was an increase in the generic dispensing rate, which grew approximately 165 basis points year on year. CVS’ specialty pharmacy services continued to gain share in Q4 2015.

Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer, among others. Because of the specialized way in which these drugs need to be administered, specialty pharmacies play an important role in providing the support required to effectively deliver these drugs to patients. CVS’ Specialty Connect offering, which was rolled out by May 2014, fills this need for greater convenience and access to specialty medications. The Specialty market in the U.S. currently amounts to $87 billion and is expected to grow 9.1% by 2020.

Q1′ 16 Guidance

– GAAP and adjusted EPS in the range of $1.03 to $1.06 and $1.14 to $1.17, respectively.

Fiscal 2016 Outlook

– Net revenue growth of 17% to 18.5%.

– Full year free cash flow to be in the range of $5.3 to $5.6 billion.

– Adjusted EPS of $5.73 to $5.88, excluding acquisition-related transaction and financing costs.

– GAAP diluted EPS in the range of $5.28 to $5.43.

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