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CVS bullish about ‘unmatched suite of assets’

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NEW YORK — CVS Health “has made the right moves,” and is “very excited about the enterprise that we have become,” president and chief executive officer Larry Merlo said at the company’s annual Analyst Day here.

CVS is well positioned to meet the changing needs of consumers, payers and providers with its integrated retail pharmacy, pharmacy benefit management, retail clinic and specialty pharmacy businesses, Merlo and other company executives said at the event, held last month.

“We foresaw the changes in the health care landscape, and we built a suite of assets to capitalize on the opportunities created. As a result, we are driving solid growth,” Merlo told analysts. What’s more, CVS remains “a category of one,” he said. “It’s still only CVS with an integrated pharmacy model, and one that continues to resonate with clients and customers. And it’s driving success in the market. Our suite of assets remains unmatched.”

CVS emphasized its position as a “pharmacy innovation company” that takes a channel-agnostic, enterprise approach to help people manage and improve their health while driving value for all stakeholders. That’s reflected in the recent change of the corporate name to CVS Health, according to Merlo. “Our new name also ushers in a new era of growth for our company, and it really underscores our purpose of helping people on their path to better health.”

Chief financial officer Dave Denton reaffirmed CVS’ earnings guidance for 2014. The company estimates adjusted earnings per share (EPS) from continuing operations at $4.47 to $4.50, a gain of 12.75% to 13.5%.

“Our core business has continued to grow at a significant pace this year, as our strategies have led to an increase in our share of dispensed drugs, which in turn has led to productive growth in operating profit,” he said.

In 2015, CVS projects adjusted EPS from continuing operations of $5.05 to $5.19, up 12.5% to 15.75%. “While overall 2015 is expected to be a strong growth year, the cadence of growth is expected to be back-half weighted,” Denton said, citing the impact of CVS’ exit from the tobacco market and generic drug launches, among other factors.

On average, analysts peg CVS’ 2014 adjusted EPS at $4.50, with estimates ranging from $4.48 to $4.53. For 2015, the consensus analyst estimate is for CVS to generate adjusted EPS of $5.12, with projections running from $5.05 to $5.27.

“While the U.S. health care market is dynamic, one thing is not changing: strong operating performance for CVS Health,” William Blair & Co. analyst Mark Miller wrote in a research note. “Other constants for CVS include continuity of executive management, market share gains in the PBM and retail businesses, large free cash flow, a rising dividend and impressive EPS growth during a tumultuous time for competitors. We continue to believe the integrated model is well positioned to capitalize on emerging health care trends.”

William Blair & Co. forecasts CVS’ 2014 EPS at $4.53 and raised its 2015 EPS estimate by 10 cents to $5.20, both above CVS’ projections.

“It is particularly impressive that CVS has been able to sustain this strong growth despite an estimated 17 cents EPS detriment from the exit of tobacco [for 2014 and 2015] and compared with the relative weakness of direct competitors,” Miller stated.

In other presentations, CVS executives outlined how the company is readying for the continued evolution of the health care delivery system through its PBM, specialty pharmacy and retail pharmacy assets, as well as how it’s expanding access to care via CVS/minuteclinic and fostering a more connected health care system.

“Our CVS/pharmacy retail business continues to turn in strong performance, with a history of market share gains in both front-store and pharmacy,” said CVS/pharmacy president Helena Foulkes.

In the front end, CVS’ market share growth is 1.5 times that of the multioutlet channel over the last five years. “We’ve grown our front-store share despite the fact that consumers continue to exhibit cost-conscious shopping behaviors,” Foulkes said.

Also during that time, CVS’ prescription market share rose to 21% from 18.7%. Foulkes noted that more than one of every five U.S. prescriptions was filled at CVS/pharmacy in 2014. “This is driven by our unique business model and all the programs that we put in place to provide excellent service and value to our customers,” she said.

Credit Suisse analyst Edward Kelly noted that CVS has identified health and beauty as a growth catalyst in today’s challenging front-end environment.

“The company estimates the addition of more grab-and-go healthy food products could be a $1 billion opportunity,” he wrote in a research note. “Management also plans to update its beauty offering by launching new brands, upgrading displays and end-caps, and ‘elevating’ the category in its best stores.”

Meanwhile, CVS reported that the PBM business experienced a successful selling season in 2014, with $3.2 billion in net new business and a client retention rate of 96%.

“We have demonstrated consistent growth in revenue year after year,” said CVS/caremark president Jon Roberts. “We’re projecting 2015 revenue of approximately $98 billion, nearly double our 2011 revenue. Over the same period, we’ll grow our operating profit by about 70%. I think it’s clear: Our model is resonating in the market across all sectors.”

CVS programs such as Maintenance Choice, Specialty Connect and Pharmacy Advisor “are resonating with clients,” according to Credit Suisse’s Kelly. “CVS’ differentiated suite of offerings appears to be helping the company win new business,” he stated. “Controlling drug spend, primarily within specialty, is top of mind for clients and an area where CVS can add value.”


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