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CVS Health beats Q3 earnings forecast

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Drug services, retail segments show gains.

WOONSOCKET, R.I. — CVS Health turned in another impressive showing  in the third quarter of 2019, as both adjusted earnings and revenues exceeded analysts’ estimates. Based on the solid performance, the company raised its full-year guidance on adjusted earnings.

Larry Merlo

“Our third-quarter results build on the positive momentum we have seen across the company since the beginning of the year,” said president and chief executive officer Larry Merlo. “All of our core businesses performed in line with or above expectations, reflecting strong operational execution. As a result, we delivered strong growth and generated robust operating cash flow, which enabled us to deliver while returning capital to our shareholders.”

Reported, or GAAP, income from continuing operations rose 10% to $1.53 billion although earnings decreased 14% to $1.17 per share from $1.36 in the prior-year quarter. GAAP EPS fell short of analysts’ consensus projection of $1.25 per share.

Adjusted income from continuing operations, though, soared 36.1% to $2.41 billion, or $1.84 cents per share, beating analysts’ average estimate by 7 cents. GAAP earnings reflected several unusual items, including most notably $607 million for pretax amortization of intangible assets, a $205 million pretax loss on the sale of Onofre, and $220 million in income tax expense.

Total revenue expanded 36.5% to $64.81 billion, well above analysts’ average forecast of $62.99 billion. The dramatic top-line increase was driven mainly by the acquisition of Aetna Inc. last November as well as higher prescription volume and brand-name drug price inflation in both the Pharmacy Services and Retail/LTC segments. That momentum was partially offset, however, by ongoing price compression in Pharmacy Services and reimbursement pressure in the Retail/LTC business as well as a higher generic dispensing rate.

Consolidated operating income grew 13.8% to $2.93 billion while adjusted operating profit escalated 48.9% to $3.95 billion, again driven mainly by the Aetna acquisition plus higher claims volume and improved purchasing economics in the Pharmacy Services segment. Those positive factors were countered somewhat by the aforementioned reimbursement pressures in Retail/LTC and continued price compression in Pharmacy Services.

Total revenues in the Pharmacy Services segment gained 6.4% to $36.02 billion while reported operating income improved 5.1% to $1.34 billion and adjusted operating profit grew 5.7% to $1.44 billion. The improved operating results were propelled by increased claims volume, the addition of Aetna’s mail order and specialty pharmacy operations and improved purchasing economies, offset by the price compression noted above.

Although revenues in the Retail/LTC segment advanced 2.9% to $21.47 billion, reported operating income plunged 26.6% to $1.10 billion and slid 6.5% to $1.52 billion on an adjusted basis. The decline in operating results reflected the previously mentioned reimbursement pressures that were somewhat ameliorated by higher prescription volume and higher front-end margins. Also weighing on results were the $205 million pre-tax loss on the sale of Onofre and a $96 million store rationalization charge.

Reflecting the benefits of the Aetna purchase, CVS’s Health Care Benefits segment contributed total revenues of $17.18 billion and operating income of $1.04 billion, or $1.42 billion on an adjusted basis.

With another strong quarter on the books, CVS raised and narrowed its adjusted earnings forecast to a range of $6.97 to $7.05 from prior guidance of $6.89 to $7.00. The company lowered its outlook for GAAP earnings, though to a range of $4.90 to $4.98 from its earlier estimate of $4.93 to $5.04.

“Based on strong year-to-date performance, we are raising and narrowing our full-year 2019 adjusted EPS guidance range to $6.97 to $7.05,” Merlo said. “As we approach the first anniversary of the Aetna acquisition, we are increasingly confident in the strength of our broad and differentiated assets as a combined company and our ability to deliver compelling value to our customers and the communities we were. Looking ahead, we remain focused on successful execution of our strategic priorities and integration plans.”


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