CVS Health Q1 results surpass company expectations

WOONSOCKET, R.I. — CVS Health on Tuesday reported net income for the three months ended March 31 decreased 16.9% year over year to $953 million. According to CVS, this decline was primarily driven by the decline in operating profit, partially offset by lower interest expense of $31 million related to refinancing activity in the prior year as well as the improvement in the effective income tax rate, from 39.4% to 37.3%. The decrease in the tax rate was largely driven by $19 million in discrete tax benefits related to the required adoption of new accounting guidance for share-based compensation.

Net revenues were strong though, increasing 3%, or $1.3 billion, to $44.5 billion, up from $43.2 billion in the three months ended March 31, 2016.

Revenues in the pharmacy services segment also were robust, increasing 8.5% to $31.2 billion in 2017’s Q1. This increase was primarily driven by growth in pharmacy network claim volume as well as brand inflation and growth in specialty pharmacy, partially offset by increased generic dispensing and price compression. Pharmacy network claims processed during Q1 increased 10.5%, on a 30-day equivalent basis, to 376.8 million, compared to 340.9 million in the prior year. The increase in pharmacy network claim volume was primarily due to an increase in net new business. Mail choice claims processed during the three months ended March 31, 2017, increased 4.5%, on a 30-day equivalent basis, to 63.7 million, compared to 61 million in the prior year. The increase in the mail choice claim volume was primarily driven by continued adoption of our Maintenance Choice offerings and an increase in specialty pharmacy claims.

Revenues in the retail/LTC segment decreased 3.8% to $19.3 billion in the three months ended March 31, 2017. The decrease was largely driven by a 4.7% decrease in same-store sales, continued reimbursement pressure and an increase in the generic dispensing rate.

Pharmacy same-store sales decreased 4.7% and were negatively impacted by approximately 480 basis points due to recent generic introductions. Same-store prescription volumes declined 1.4%, on a 30-day equivalent basis, in the quarter.

“2017 is off to a solid start as we posted results this quarter that surpassed our expectations. At the same time, we generated $3.1 billion of free cash and continued to return value to our shareholders through high-return investments in our business as well as dividends and share repurchases,” said president and CEO Larry Merlo. “However, while we are pleased with our financial performance versus our expectations, we won’t be satisfied until the company returns to sustainable, healthy earnings growth.”

Regarding the remainder of 2017, CVS confirmed its previous earnings per share and cash flow guidance for the full year and provided guidance for the second quarter of 2017. The company continues to expect to deliver GAAP diluted EPS of $5.02 to $5.18 and Adjusted EPS of $5.77 to $5.93 for the full year 2017. CVS expects to deliver GAAP diluted EPS of $1.15 to $1.19 and Adjusted EPS of $1.29 to $1.33 in the second quarter of 2017. It also confirmed its 2017 cash flow from operations guidance of $7.7 to $8.6 billion and free cash flow guidance of $6 to $6.4 billion. These 2017 guidance estimates assume the completion of $5 billion in share repurchases.

“We continue to expect 2017 to be a rebuilding year, but our goals remain clear, and we fully intend to return to healthy levels of growth,” Merlo said. “We remain confident in our model as well as our position in the evolving health care landscape, and our ability to generate significant levels of cash will continue to play an important role in driving shareholder value over the longer term.”

During Q1, CVS opened 27 new retail stores and closed 60 retail stores. In addition, it relocated 10 retail stores. As of March 31, CVS operated 9,676 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.

As previously announced, CVS intends to close a total of approximately 70 retail stores during 2017 and expects to take a cumulative charge of approximately $220 million primarily associated with the remaining lease obligations of such stores. It closed 60 of the 70 retail stores in Q1 2017 and took a charge of $199 million. CVS expects to close approximately 10 additional stores during the remainder of 2017.