CVS Health gets 1Q boost from PBM

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CEO Larry Merlo says company delivered 'better-than-expected' results

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WOONSOCKET, R.I. — Citing a strong performance by its pharmacy benefit management business, CVS Health posted a double-digit sales gain for the first quarter, with adjusted earnings topping Wall Street’s projections.

CVS said Friday that net sales for the three months ended March 31 totaled $36.33 billion, up 11.1% from $32.69 billion a year earlier.

Sales for CVS’ retail pharmacy business edged up 2.9% to $16.95 billion for the first quarter from $16.48 billion in the year-ago period. Same-store sales grew 1.2%, reflecting a 4.2% gain in the pharmacy and a 6.1% decrease in the front end.

CVS estimated that front-end comparable-sales would have been about 800 basis points higher if tobacco and related basket sales were excluded from the 2014 first quarter. The company stopped selling tobacco products in all CVS/pharmacy stores as of early September. CVS added that same-store sales in the front end also were impacted by softer customer traffic, partially offset by increased basket size.

Larry Merlo, CEO CVS Caremark

Larry Merlo

Comparable pharmacy sales reflect negative impacts of 280 basis points from introductions of new generic drugs and 190 basis points from the implementation of the Specialty Connect specialty drug program. Comp-store prescription count rose 5.1% on a 30-day equivalent basis in the first quarter, partially driven by strong seasonal volume, CVS said. The company noted that the implementation of Specialty Connect had a greater effect on revenue than script count because of the higher dollar value of specialty medications.

In the PBM segment, also known as pharmacy services, first-quarter sales surged to $23.88 billion, up 18.2% from $20.20 billion a year earlier. CVS said the gain stemmed mainly from growth in specialty pharmacy and pharmacy network claims. Pharmacy network claims processed in the quarter rose 11% to 230.8 million, primarily due to net new business as well as growth in managed Medicaid and public exchanges, according to the company. Mail choice claims increased 2.7% to 20.3 million, fueled mainly by specialty claim volume and increased claims related to the adoption of the Maintenance Choice program.

CVS reported that its generic dispensing rate in the first quarter climbed about 150 basis points year over year in both of its business segments, coming in at 84.4% for retail pharmacy and 83.5% in pharmacy services.

On the earnings side, net income in the first quarter totaled $1.22 billion, or $1.07 per diluted share, compared with $1.13 billion, or 95 cents per diluted share, in the prior-year period. CVS said adjusted earnings per share (EPS) for the quarter came in at $1.14, compared with $1.02 a year earlier, and excludes $129 million and $131 million in 2015 and 2014, respectively, of intangible asset amortization related to acquisition activity.

Analysts, on average, forecast CVS’ adjusted EPS for the first quarter at $1.08, with estimates ranging from a low of $1.06 to a high of $1.09, according to Thomson Financial.

CVS noted that first-quarter earnings got a lift from higher generics dispensing in the retail pharmacy and PBM segments. In addition, the PBM was positively impacted by growth in specialty pharmacy and favorable purchasing and rebate economics, partially offset by price compression, the company said. Increased sales, an improved front-end margin — largely driven by the removal of tobacco products — and favorable purchasing economics in the drug store business also spurred earnings, partially offset by reimbursement pressure.

“We delivered better-than-expected results this quarter, primarily driven by stronger-than-expected prescription volumes as well as favorable purchasing and rebate economics in the PBM,” CVS Health president and chief executive officer Larry Merlo said in a statement.  “Adjusted EPS increased 12.2%, to $1.14, five cents above the high end of our guidance range, with operating profit in the retail business in line with our expectations and operating profit in the PBM exceeding our expectations. We also generated approximately $1.6 billion in free cash flow, and we continued to return significant value to our shareholders through our disciplined capital allocation practices.”

CVS raised the low end of its EPS guidance for the fiscal 2015. The company now projects adjusted EPS of $5.08 to $5.19 for the year, up from $5.05 to $5.19, and GAAP diluted EPS from continuing operations of $4.80 to $4.91, up from $4.77 to $4.91 in 2015. For the 2015 second quarter, CVS forecasts adjusted EPS of $1.17 to $1.20 and GAAP diluted EPS from continuing operations of $1.10 to $1.13.

Analysts estimate CVS’ full-year 2015 adjusted EPS at $5.16, on average, with projections running from a low of $5.12 to a high of $5.20, according to Thomson Financial. The consensus estimate for CVS’ second quarter is adjusted EPS of $1.25, with a range of $1.16 to $1.30.

“We are already off to a solid start in the 2016 PBM selling season,” Merlo added. “Our integrated model allows us to provide differentiated products and services that generate savings for our clients while providing better health outcomes and convenience for patients. We remain very well-positioned with our distinctive, channel-agnostic solutions, which are resonating strongly in the marketplace.”

The strong first-quarter report led William Blair & Co. analyst Mark Miller to take a bullish outlook on CVS Health’s stock.

“We reiterate our ‘outperform’ rating and see no reason to dial back enthusiasm for shares, even as we recognize that analysts and investors widely embrace CVS Health’s strong operating momentum,” Miller said in a research note on Friday. “The key metric for us is the CVS store penetration of the PBM book of business. That increased from 20% pre-merger to about 40% today. If CVS can drive that dispensing share to 60%, the company has visibility on another three years (at least) of strong growth, basically using the same playbook that has allowed it to steadily gain share over the past five years.”

During the first quarter, CVS opened 38 new retail drug stores, relocated 12 stores and closed 10 stores. As of March 31, the company had 8,006 locations in 47 states, the District of Columbia, Puerto Rico and Brazil, including 7,850 retail drug stores, 17 on-site pharmacies, 24 retail specialty pharmacies, 11 specialty mail-order pharmacies, four mail-service dispensing pharmacies, and 86 branches for infusion and enteral services, including about 70 ambulatory infusion suites and six centers of excellence.


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