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CVS Health beats Street in Q3

CVS Health’s third-quarter results beat Wall Street expectations, with the Woonsocket, R.I.-based company posting $47.3 billion in revenue and $1.73 in earnings per share ahead of the expected close of its acquisition of Aetna. The revenue represents year-over-year growth of 2.4%, as its same-store prescriptions grew 9.2% and its pharmacy services segment claims increased 5.7% for the quarter ended Sept. 30. Year-to-date, the company said it has generated $6.4 billion in cash flow from operations and free cash flow of roughly $4.9 billion.

“Strong revenue and adjusted EPS, along with significant cash flow year-to-date, demonstrate our success in driving value,” said CVS Health president and CEO Larry Merlo. “Our year-to-date results continue to validate our confidence in the strength of our model. As we approach the closing of our transformative acquisition of Aetna, our integration teams are making great progress to assure that once final approvals are obtained, we can begin to execute on our integration plans.”

Net income for the quarter was $1.4 billion — up 8.2% ($105 million) year-over-year. CVS Health cited a $268 million decline in its income tax provision, offset by a decline in pre-tax income, as the primary driver of the increase. Its $163 million decrease in pre-tax income was attributed to the net interest expense on financing associated with the Aetna transaction.

Consolidated operating profit for the quarter declined $146 million, or roughly 5.8%, to $2.4 billion. The company said this was driven by a $64 million increase in costs related to the Aetna acquisition, as well as an increase in operated expenses from investing tax cut savings into wages and benefits, and an increase in operating expenses. Gross profit in its business segments helped offset the decline, the company said.

The company’s retail/long-term-care segment saw revenues increase 6.4% to $20.9 billion in the quarter. Much of this growth was attributed to same-store prescription growth, which increased 9.2% year-over-year on a 30-day equivalent basis. CVS Health cited adoption of its patient care programs, PBM and health plan alliances and inclusion in various Medicare Part D networks — as well as brand inflation — as the primary drivers, though they were offset slightly by reimbursement pressure.

Same-store sales increased 6.7%, with pharmacy same-store sales up 8.7% in the quarter. CVS Health noted that recent generic introductions had a negative impact of 190 basis points on growth. Its generic dispensing rate for the quarter was 87.3% in the retail/LTC segment, up roughly 10 basis points. Front-store sales increased 0.8% for the quarter, which CVS Health attributed to health and beauty care category sales.

Revenue for the quarter from its pharmacy service segment increased 2.6% year-over-year to $33.8 billion. The company said this growth was driven by pharmacy network and mail choice claim volume growth, as well as brand inflation — all offset by price compression. The company processed 394.5 million claims on a 30-day equivalent basis for the quarter, marking a 5.4% increase over the year-ago period. Mail choice claims increased 7.4% to 71.8 million on a 30-day equivalent basis. Generic dispensing rate for the segment increased 20 basis points to 87.2%.

Looking forward, CVS Health affirmed its standalone guidance, continuing to expect a decline in GAAP consolidated operating profit of between 39% and 41%, reflecting a Q2 goodwill impairment. It expects adjusted EPS of between $6.98 and $7.08 for the full-year. Its cash flow from operations is expected to be roughly $9 billion, with $7 billion in free cash flow.

Since the close of Q3, CVS Health received the Department of Justice’s conditional approval of the Aetna acquisition, dependent on the divestment of Aetna’s standalone Medicare Part D prescription drug plans. The company is selling those assets to a subsidiary of WellCare Health plans, with the close subject to the close of the merger. The company now is waiting on five state approvals, with the transaction expected to close by Thanksgiving.

“While CVS and Aetna remain separate companies today, the performance of both companies highlights the very solid financial foundation on which we’ll build our revolutionary new model that will transform the health care experience for consumers and, in the process, deliver substantial value for our shareholders,” Merlo said.
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