UPDATED: PBM drives CVS in Q3, but front-end retail sales decline
WOONSOCKET, R.I. — Strong results in its PBM business provided a boost during CVS Health’s fiscal third quarter, with the retailer on Nov. 8 reporting a 23.6% increase in net earnings to $1.5 billion and a revenue increase of 15.5 percent to $6 billion for the period ended Sept. 30.
"We posted a solid third quarter with the PBM exceeding our expectations and retail performing at the lower end of our expectations. However, very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter, said CVS President and CEO Larry Merlo. “In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business. These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in PBM operating profit growth in 2017, we expect a decrease in retail operating profit growth."
Front store same-store sales were a culprit regarding retail sales, which decreased 1.0%. According to CVS, this segment of retail was negatively affected by softer customer traffic partially offset by an increase in basket size. The company did note though that front store margins improved considerably in its fiscal Q3 and front store spend and margin increased for its “most valuable customers.” In the near-term, CVS will look to improve front store results by focusing on shifting toward higher-margin health, beauty and store brand categories.
Acquisitions helped CVS in its most recent quarter. Revenues in CVS’ Retail/LTC Segment increased 12.5%, or $2.2 billion, to approximately $20.1 billion, in the three months ended Sept. 30. The increase was primarily driven by the addition of the long-term care pharmacy operations acquired as part of its acquisition of Omnicare, the addition of the pharmacies and clinics of Target, and pharmacy same-store sales growth.
Overall, same-store sales increased 2.3% versus the third quarter of 2015. Pharmacy same-store sales rose 3.4% and pharmacy same-store prescription volumes rose 3.0% on a 30-day equivalent basis.
Looking ahead, CVS lowered and narrowed its full year GAAP diluted earnings-per-share to $4.84 to $4.90 from $4.92 to $5 per share. It also issued a preliminary outlook for 2017, with GAAP diluted earnings per share expected to be in the range of $5.16 to $5.33 and adjusted EPS is expected to be in the range of $5.77 to $5.93.
Merlo stated next year will be challenging. “We are not happy with our outlook for 2017,” he said.
Regarding why 2017 will be a challenge, the company squashed such media reports that the U.S. presidential election will have any significant affect on the company. But a major headwind next year will be its loss of more than 40 million retail Prime Therapeutics and Tricare prescriptions to Walgreens. CVS EVP and CFO David Denton acknowledged during the question-and-answer portion of the earnings call that the company was “caught off guard” by these network changes and was not given an opportunity to match any pricing changes. However, Denton stressed CVS has a response plan in place, including offering a suite of services to its customers, including MinuteClinic, its infusion specialty suite of services and long-term care pharmacy.
“We believe we will be the partner of choice moving forward,” Denton said. “We have a response plan to market dynamics. … Our value proposition continues to resonate on both a PBM and retail basis.”
Denton added CVS is “very well positioned in the marketplace” and in 2018 and beyond it expects to return to “healthy growth.” “We have the right assets in terms of the healthcare environment moving forward,” he said.
“We are confident our response and actions will generate growth moving forward,” added Merlo.
Looking at Q3 individual aspects of its business:
PBM had gross wins of more than $7.6 billion with net new business of more than $4.4 billion and a retention rate of 97 percent
MinuteClinic had a strong Q3, with revenues increasing 23 percent year over year, including Target. Also, use of on-line wait times or “Hold My Place in Line” queuing tool continues to grow at its 1,136 clinics.
The now fully integrated CVS at Target and Omnicare performed in line with expectations
Caremark had a very successful selling season
During its 2016 Q3, CVS opened 48 new retail stores and closed six retail stores. In addition, it relocated 11 retail stores. As of Sept. 30, it operated 9,694 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.
On a digital basis, CVS announced nearly 2 million scripts have been filled using its mobile prescription pickup since its launch. The retailer also expressed optimism in its CVS Curbside service, which launched in more than 4,000 stores in 40 markets in September, as well as CVS Pay, a simple way to pay for both front store and pharmacy transactions.
Woonsocket-based CVS also announced the board of directors approved a new share repurchase program for up to $15 billion of the company's outstanding common stock. Denton noted that exhibiting a sign of financial strength, the retailer expects to raise its dividend in the near future.