Key Takeaways From CVS Fourth Quarter Earnings

by Trefis Team
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CVS Health (NYSE:CVS), the second largest drugstore chain in the U.S., has posted healthy growth in its fourth quarter and full year results.  The company posted a 5.3% increase in sales to $48.4 billion in Q4 while full year 2017 sales rose by 4.1% to $184.8 billion. This growth was primarily driven by strong growth in pharmacy network and specialty pharmacy volume. During 2017, CVS opened 175 retail stores, closed 81, and relocated another 30 stores. As of the 2017 year-end, the company operated 9,803 retail locations including pharmacies in the Target stores. This compares to 9,709 stores at the end of 2016. [1]

The company’s adjusted earnings driven by strong performance in its Pharmacy Services segment also rose marginally to $5.90 per share in 2017, from $5.84 in 2016. 2017’s adjusted earnings exclude $1.5 billion income tax benefit from U.S. Tax reforms and Jobs Act (TCJA).

Looking ahead, the company is now forecasting a -1.5% to +1.5% growth in its operating profit for the year, a reduction from its earlier 1-4% forecast.  Please refer to our dashboard analysis on CVS.

Segment-Wise Performance

Revenue for its Pharmacy Services segment grew by  9.3% y-o-y to $34.2 billion in the fourth quarter driven by the rise in pharmacy network claims, brand inflation, and growth in specialty pharmacy. This segment includes the pharmacy benefits manager business and specialty pharmacy services.

In its Retail/LTC segment, revenues increased more modestly by 0.9% to $20.9 billion driven by moderate increase in same store prescriptions and brand inflation.

Given that the company started 2017 with lost contracts from the Department of Defense and Prime Therapeutics to its rival Walgreens, it recovered well during the year to post this growth. The company took several measures to counter the loss of contracts including expansion of its ongoing partnership with Optum and the offer of bundled service offerings to its customers. Focus on store rationalization and optimization of delivery platform also helped improve productivity.

CVS’ Business Will Likely Receive A Major Boost From the Acquisition of Aetna

Announced in December 2017, the acquisition of Aetna by CVS will likely provide a major boost to CVS’s business in 2018 and beyond. The combination is expected to provide consumers with a more integrated experience, reduced costs, and improved access to health care experts in homes. This will combine CVS’s dense local presence through pharmacies and clinics with Aetna’s health care benefits and services.

CVS’s PBM business will get a shot in the arm due to greater negotiating power with the drug companies. The company will also be able to tap into Aetna’s 45 million user base and provide them with its offerings which include pharmacy benefit management – the negotiation of  drug prices on the behalf of insurance companies – MinuteClinics, home infusion services, and long-term care pharmacies.

Outlook for full fiscal 2018

We anticipate CVS to continue its healthy growth momentum in 2018 with a rise in the top line. Management forecasts more cautious full year 2018 adjusted operating profit growth in the range of between -1.5% to +1.5%.

 

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Notes:
  1. CVS Health reports Q4 2016 results, Feb 2017, www.cvs.com []
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