CVS Health’s Q4, 2018 buoyed by strong retail, PBM script growth

CVS Health has posted its fourth-quarter results for its fourth quarter and full-year, bringing in revenues of $54.4 billion for Q4 — an increase of 12.5% over the previous year. For its full-year period, the company saw sales increase to $194.6 billion, a 5.4% increase over its full fiscal 2017.

Though the company’s earnings beat its earnings forecast — and despite being buoyed by prescription growth and an increase in the retail/LTC segment — the company swung to a net loss of $421 million for the quarter, compared with $3.29 billion in net income in the prior-year. The company’s earnings per share for the quarter hit a $1.99 loss, with an adjusted EPS of $2.14. Full-year net loss was $594 million, or $5.89 per share.

“2018 was a milestone year for CVS Health as we successfully completed our transformational merger with Aetna, began effective implementation of our integration strategy, and took important steps toward building the integrated healthcare model that will bring substantial value to our various stakeholders. We had strong financial performance and delivered on our operating expectations,” president and CEO Larry Merlo said.

Revenues in the company’s retail/long-term care segment increased 5.4% for the quarter to $22 billion and 5.8% for the full-year to $79.4 billion. CVS Health said the increase was primarily driven by increased prescription volume and branded drug price inflation, which was partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Total prescription volume grew 8.6% for the quarter over the prior-year period, with an 8.8% increase in full-year script volume, all on a 30-day equivalent basis. The growth was driven mainly by the continued adoption of patient care programs and collaborations with PBMs as well as preferred status in a number of Medicare Part D networks during 2018, CVS Health said. Front-store revenues remain approximately 23% of total retail/LTC segment revenues, and the company said front-store revenues increased for Q4 and the full-year 2018, driven by health product sales.

Despite strong retail performance, the segment swung to a $270 million operating loss for the quarter, compared with $2.1 billion in Q4 2017, reflecting goodwill impairment charges of $2.2 billion relating to the LTC reporting unit. For the year, $620 million in operating income (compared with $6.5 billion in 2017) was the result of a $6.1 billion goodwill impairment charge for the LTC reporting unit. The company said the decline in operating income also was due to increased operating expenses as a result of the investment of a portion of the savings from the TCJA in wages and benefits, CVS Health said.

CVS Health reported that its LTC business has continued to experience industry-wide challenges that have impacted its ability to grow the business at the rate that was originally estimated when the company acquired Omnicare in 2015.

“These challenges include lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures,” CVS Health said.

In the pharmacy services segment, revenues increased 2.2% for the quarter, compared with the prior year, which the company attributed to increased total pharmacy claims volume, partially offset by continued client pricing pressures. Total prescription volume grew 8.6%  for the quarter compared to the prior year. For the year, revenues in the segment grew 2.7%.

The company’s full year 2019 consolidated GAAP operating income is projected to be in the range of $11.7 billion to $12.1 billion while adjusted operating income is projected to be in the range of $14.8 billion to $15.2 billion.

GAAP diluted EPS from continuing operations is projected to be in the range of $4.88 to $5.08, and adjusted EPS is projected to be in the range of $6.68 to $6.88. The adjustments between GAAP operating income and GAAP diluted EPS from continuing operations and adjusted operating income and adjusted EPS include adding back amortization of intangible assets and integration costs related to the acquisition of Aetna. The company said it expects to continue to generate strong cash flows in 2019, with projected cash flow from operations between $9.8 billion and $10.3 billion.

“With the completion of the Aetna acquisition, we have set the stage for CVS Health to excel in a market that is rapidly transforming. We strongly believe in the long-term value that the full breadth of our capabilities can provide,” Merlo said. “2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy. We are fully aware of the need to address the impact of certain headwinds that are having a disproportionate impact in 2019 compared to prior years, and importantly, we are taking comprehensive actions to move past them. We understand acutely the importance of balancing near-term execution with longer-term vision, and we are confident that our actions will position us well in 2020 and beyond.”