PBM unit fuels revenue gain while retail segment sales dip

WOONSOCKET, R.I. — CVS Health beat Wall Street’s earnings forecast for the second quarter and bumped up the bottom of its 2017 guidance despite declined sales in its retail pharmacy business unit.

CVS said Tuesday that net income for the second quarter ended June 30 totaled $1.1 billion, or $1.07 per diluted share (GAAP), compared with $924 million, or 86 cents per diluted share, a year earlier. The company attributed the gain mainly to the absence of a $542 million loss on early debt retirement in the current year, partially offset by a $240 million decrease in operating profit and an rise in the effective income tax rate from 39.5% to 41.1%.

The tax rate increase stems primarily from a nondeductible goodwill impairment charge of $135 million, partially offset by $14 million in discrete tax benefits related to the required adoption of new accounting guidance for share-based compensation on Jan. 1, CVS said.

Adjusted earnings per share (EPS) for the second quarter were $1.33, compared with $1.32 a year ago. Analysts, on average, had projected adjusted EPS of $1.31 for the period, with estimates ranging from a low of $1.29 to a high of $1.33, according to Thomson Reuters.

“The second quarter results we posted today keep us nicely on pace to achieve our full-year targets. Operating profit in the retail/LTC [long-term care] segment was in line with expectations, while operating profit in the pharmacy services segment exceeded expectations,” president and chief executive officer Larry Merlo said in a statement. “At the same time, we have generated substantial free cash flow year to date and continued to return significant value to our shareholders through dividends and share repurchases. While we are pleased to report results consistent with our expectations, we won’t be satisfied until the total enterprise returns to healthy levels of earnings growth.”

Second-quarter sales rose 4.5% to $45.69 billion from $43.73 billion in the prior-year period.

Revenue in the retail/LTC segment fell 2.2% to $19.55 billion in the quarter from $20 billion a year earlier. CVS said the decrease was driven mainly by a 2.6% decline in same-store sales, a rise in the generic drug dispensing rate and ongoing reimbursement pressure.

In the front end, same-store sales were down 2.1% year over year. CVS said the shift of the Easter holiday to the second quarter this from the first quarter in 2016 lifted results by 75 basis points, while the front end was negatively impacted by softer customer traffic and efforts to rationalize promotional strategies, partially offset by growth in basket size.

Comparable pharmacy decreased 2.8% in the second quarter, reflecting a negative impacted of 410 basis points from introductions of new generics. Same-store prescription count remained flat, on a 30-day equivalent basis. CVS said previously announced restricted networks that exclude CVS Pharmacy had a negative impact of 460 basis points on dispensed prescriptions.

The pharmacy services segment, which includes CVS’ pharmacy benefit management (PBM) business, saw revenue climb 9.5% to $32.33 billion from $29.51 billion a year ago. CVS attributed the gain mainly to growth in pharmacy network claim volume as well as brand inflation and specialty pharmacy volume, partially offset by increased generic dispensing and price compression. Pharmacy network claims processed during the three months ended June 30 increased 10.3% on a 30-day equivalent basis, to 376 million, compared to 340.9 million in the prior year.

The generic dispensing rate in the quarter rose by 150 basis points to 87.6% in the retail/LTC segment and by 130 basis points to 87.2% in the pharmacy services segment versus a year ago.

“Given our performance in the first half and our confidence in our expectations for the back half of this year, we are narrowing and raising the midpoint of our adjusted EPS guidance for 2017,” Merlo added. “Additionally, our differentiated value proposition continues to resonate in the marketplace. The 2018 selling season is shaping up to be another successful one for our PBM, with solid gross and net new business achieved to date.”

The company now projects adjusted EPS of $5.83 to $5.93 for fiscal 2017, compared with its previous guidance of $5.77 to $5.93. Third-quarter adjusted EPS is forecast at $1.47 to $1.50.

Analysts’ consensus adjusted EPS estimate for the full year is $5.87, with projections running from a low of $5.78 to a high of $5.93, according to Thomson Reuters. Third-quarter adjusted EPS is pegged at $1.63, on average, by analysts, whose estimates range from $1.51 to $1.70.

During second quarter, CVS opened 27 new drug stores, relocated 10 stores and closed three stores. As of June 30, 2017, the company operated 9,700 retail locations, including pharmacies in Target Corp. stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

CVS noted that, as previously disclosed, the company plans to close about 70 drug stores this year and take a charge of $220 million related to the remaining lease obligations of these locations. The company said it shut 63 retail stores and took a charge of $205 million in the six months ended June 30. Plans call for CVS to close seven additional stores during the rest of 2017.