CVS’ Q2 Earnings Might Be Dampened By Its Retail/LTC Segment On Account Of Its Contract Losses To Walgreen

by Trefis Team
CVS Health
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CVS Health (NYSE:CVS) is scheduled to announce its second quarter results on August 8th. The company witnessed a rough 2016 by losing contracts with the Department of Defense and Prime Therapeutics to its rival Walgreens. The new deals came into effect in December 1, 2016 and January 1, 2017, respectively, and is expected to slow down CVS’ performance in 2017. The company took several measures to counter the loss of contracts including the expansion of its ongoing partnership with Optum and the offer of bundled service offerings to its customers. It plans to improve its productivity by focusing on store rationalization and optimizing its delivery platform. These measures are expected to bring savings to the tune of $3 billion by the end of 2021.

As a result of its loss of contracts, CVS’ Q1 operating profits were 18% lower than the prior year quarter. However, the company’s top line witnessed a 3% growth year over year (y-o-y) and reported $44.5 billion in sales. The growth was fueled by the strong performance of its Pharmacy Services Segment, partially offset by weak performance of the Retail/Long Term Care Segment. In Q1, CVS closed 60 retail stores and opened another 27, which took its store count to 9,676.

The Pharmacy Benefit Management Division Seems To be Going Strong

CVS’ Pharmacy Benefit Management division has started strongly in 2017 and, after a successful enrollment period for its Medicare plans for the current year, it now has net new business of around 4.4 billion with a retention rate of almost 97%. This should help the company cope with the contract losses and provide a solid revenue source going forward. In Q1, CVS’ Pharmacy Services segment reported an increase of $2.5 billion in revenues. The increase in revenues was primarily due to net new business, which was reported at $5.4 billion, and also due to the growth in specialty pharmacy.

The Loss Of Contracts Will Continue Dampening The Retail/LTC Segment’s Performance

In Q1, CVS’ revenues from the Retail/LTC segment were significantly impacted by the loss of contracts and lower same store sales, and were reported almost 4% lower than the prior year quarter. The Pharmacy same store sales dipped 4.7% while same store prescription volumes declined 1.4%, on a 30-day equivalent basis. The network changes, coupled with one fewer day in the quarter, impacted the same store prescription volumes by almost 6 percentage points. In Q2 2017, CVS expects the loss of contracts to continue to impact the performance of the Retail/LTC segment, which is expected to report a decline in revenues in the range of 2.5% to 4.25%. The company expects the current year to be one for “rebuilding” as it continues to look for avenues to compensate the loss of contracts.

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