Pharmacy Services and Retail/LTC Sales Drive CVS’s Q2 Earnings

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CVS Health (NYSE:CVS), the second largest drugstore chain in the U.S., has posted decent growth in its second quarter 2018 results.  The company posted a 2.2% increase in sales to $46.7 billion in Q2. This growth was primarily driven by higher prescription volumes within the retail pharmacy business and a lower effective income tax rate.  The top line got a major boost by a strong Pharmacy Services segment, benefiting from the upside in the specialty services. Also, strong year-over-year Retail/LTC comparisons were encouraging as CVS continued to innovate in the healthcare market. The company currently is also moving forward toward the completion of the Aetna deal.

The company’s adjusted earnings was reported at $1.69 per share in Q2 reflecting an additional adjustment for net interest expense from the proposed Aetna acquisition.

Looking ahead, the company expects to deliver adjusted EPS in the range of $1.68 to $1.78 for Q3. CVS is focused on long-term growth initiatives and to invest in process improvements and technology enhancements that will position them well to expand their reach in providing access to high-quality and more affordable care. The Aetna transaction will provide CVS the means to further lower health care costs for consumers and payers, in turn benefiting the company in the longer run. Please refer to our dashboard analysis on Takeaways From CVS’s Q2 2018 Earnings.

Segment-Wise Performance – Revenue for its Pharmacy Services segment grew by 2.8% to approximately $33.2 billion in Q2 driven by growth in pharmacy network and specialty claim volume as well as brand inflation, partially offset by continued price compression and increased generic dispensing. This segment includes the pharmacy benefits manager business and specialty pharmacy services.

In its Retail/LTC segment, revenues increased by 5.7% to $20.7 billion driven by an increase in same store prescription volume of 9.5%, on a 30-day equivalent basis, due to continued adoption of the Patient Care Programs, partnerships with PBM’s and health plans, and inclusion in a number of additional Medicare Part D networks this year, as well as brand inflation.

Upcoming Acquisition of Aetna is Likely to give A Major Boost to CVS’s  Business- Announced in December 2017, the acquisition of Aetna by CVS will likely provide a major boost to CVS’s business in Q3 2018 and beyond. In March 2018 the transaction was approved by shareholders of both companies and it will be closed by the second half. Both the companies are closely working together under an Integration Management Office (“IMO”) led by senior executives of both companies. A steering committee comprised of the executive leadership from both CVS Health and Aetna has also been established to oversee the work of the IMO and provide guidance and strategic direction to integration leaders. 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 this healthy growth momentum in Q3 2018 and beyond with a rise in the top line. Management forecasts its GAAP diluted EPS from continuing operations to grow in the range of $1.40 to $1.50.

 

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