Business segments are expanded with addition of Omnicare

WOONSOCKET, R.I. — CVS Health posted sales gains in both its retail pharmacy and pharmacy services businesses for the 2015 third quarter, with adjusted earnings per share (EPS) finishing in line with analysts’ projections.

CVS also said Friday that it has expanded its business segments to incorporate operations from the Omnicare Inc. acquisition, which closed Aug. 18.

CVS’ retail pharmacy segment now includes the long-term care (LTC) operations, commercialization services, supply chain solutions and patient support services of Omnicare and has been renamed the retail/LTC segment. The LTC operations include the distribution of pharmaceuticals, related pharmacy consulting and other services to chronic care facilities and other care settings. Meanwhile, CVS’ pharmacy services segment, primarily the company’s pharmacy benefit management (PBM) business, now includes Omnicare’s specialty pharmacy operations.

For the third quarer ended Sept.30, CVS Health’s total sales climbed 10.3% to $38.64 billion from $35.02 billion a year earlier.

Retail/LTC segment sales rose 6.9% to $17.9 billion in the quarter, with about half of the increase stemming from the addition of Omnicare’s LTC operations, CVS said. Same-store sales for CVS/pharmacy were up 1.7% year over year, reflecting a 5.8% decline in the front end and a 4.6% gain in the pharmacy. On a 30-day equivalent basis, comparable-pharmacy prescription count grew 4.4%.

CVS noted that front-end same-store sales would have been about 490 basis points higher if tobacco products and related basket sales were excluded from the prior-year quarter. In additon, softer customer traffic impacted front-end results, partially offset by growth in basket size, the company said. Comparable pharmacy were negatively affected by 450 basis points from introductions of new generic drugs.

In the pharmacy services segment, third-quarter revenue was up 13.3% to $25.5 billion, fueled mainly by growth in specialty pharmacy and pharmacy network claims. CVS said pharmacy network claim volume rose 9.3%, primarily from net new business and growth in Managed Medicaid. Mail choice claims processed climbed 5.6%, driven by specialty pharmacy and the adoption of Maintenance Choice offerings, according to the company.

The generic drug dispensing rate edged up about 140 basis points to 84.8% in the retail/LTC segment and 130 basis points to 83.8% in the pharmacy services segment during the quarter.

Larry Merlo

On the earnings side, income from continuing operations for the third quarter was $1.2 billion, including the effect of $16 million of pretax acquisition-related bridge financing costs and the transaction and integration costs (an aggregate of 10 cents per diluted share) related to the acquisition of Omnicare and the pending purchase of Target Corp.’s pharmacies and retail clinics. Income from continuing operations for the year-ago quarter was $0.9 billion, including a $521 million pretax loss (27 cents per diluted share) on the early extinguishment of debt.

GAAP diluted EPS from continuing operations for the 2015 third quarter was $1.10, compared with 81 cents a year earlier. 

CVS reported adjusted EPS of $1.18 for the 2015 quarter, compared with 88 cents in the prior-year period. The company said the latest quarter’s adjusted EPS excludes $160 million and $126 million in 2015 and 2014, respectively, of intangible asset amortization related to acquisition activity. CVS noted that, adjusting for acquisition-related items and the loss on early extinguishment of debt in 2014, adjusted EPS was $1.29, at the higher end of the company’s $1.27 to $1.30 guidance range.

The inclusion of Omnicare’s operations midway through the third quarter, which nearly offset the dilution from the July 2015 debt financing, resulted in 1 cent of net dilution in the quarter, according to CVS, which added that those items weren’t included in prior guidance due to the uncertainty around the timing of the close of the Omnicare acquisition. Including the 1 cent of net dilution, adjusted EPS was $1.28 for the 2015 quarter.

Analysts, on average, had forecast CVS’ adjusted EPS for the third quarter at $1.29, with estimates ranging from a low of $1.25 to a high of $1.35, according to Thomson Financial.

“I’m very pleased to report third-quarter results that are at the higher end of our expectations. We delivered solid revenue and operating profit growth across our businesses, and we continue to expect significant growth in the fourth quarter, rounding out another terrific year for our company,” CVS Health president and chief executive officer Larry Merlo said in a statement. “Year to date, we generated $3.4 billion of free cash, and we are on pace to return more than $6 billion to our shareholders through dividends and share repurchases in 2015.”

Operating profit in the third quarter rose by $116 million in the retail/LTC segment and $75 million in the pharmacy services segment. Excluding acquisition-related transaction and integration costs, the retail/LTC segment grew 8.4% and the pharmacy services segment grew 7%.

“The third quarter included the closing of the Omnicare acquisition in mid-August, and we are very optimistic about the potential that this long-term care business creates for us,” Merlo added. “It provides a new pharmacy dispensing channel, enhancing our ability to provide continuity of care for patients as they transition through the health care system. At the same time, we look forward to closing the Target pharmacy acquisition, which will enable us to reach more patients, add a new retail channel for our unique offerings and expand convenient options for consumers. These acquisitions reinforce our progress on our established long-term targets.”

Announced in mid-June, the Target deal is expected to close near the end of the year, CVS reported. The agreement to acquire Omnicare was unveiled in late May.

During the third quarter, CVS opened 43 new retail drug stores, relocated 11 stores and closed two stores. As of Sept. 30, the company operated 7,911 retail drug stores in 44 states, the District of Columbia, Puerto Rico and Brazil.

Looking ahead, CVS raised the low end of its guidance for 2015, projecting adjusted EPS of $5.14 to $5.18, compared with $5.11 to $5.18 previously. GAAP diluted EPS is pegged at $4.69 to $4.73, up from earlier guidance of $4.64 to $4.71. The consensus analyst estimate is for adjusted EPS of $5.16 for 2015, with projections running from a low of $5.10 to a high of $5.21, according to Thomson Financial.

CVS forecasts 2015 fourth-quarter adjusted EPS at $1.51 to $1.55, excluding acquisition-related transaction and integration costs. Analysts project the quarter’s adjusted EPS to range from $1.45 to $1.54, with a consensus estimate of $1.50.

In addition, CVS gave a preliminary outlook for 2016 that reflects 10% to 14% growth in adjusted EPS to a range of $5.68 to $5.88, which the company said is in line with five-year growth targets it provided at its Analyst Day in December 2013 for the period of 2013 to 2018. CVS added that the outlook for 2016 reflects growth from 2013 to 2016 at a compounded annual rate of 13% to 14%, at the higher end of its five-year targets.

On average, analysts forecast CVS’ 2016 adjusted EPS at $6.02, with estimates running from $5.88 to $6.15, according to Thomson Financial.