CVS Health's Big Story in the 3rd Quarter: Ready for Aetna
Major changes are sweeping through the pharmacy industry. CVS Health Corporation (NYSE: CVS) provides a good example. Among other things, the pharmacy services giant is acquiring health insurer Aetna (NYSE: AET) in a megadeal and experimenting with a new membership rewards program to differentiate itself from rivals.
In the midst of all these big changes, though, CVS Health still has its day-to-day business to run. The company provided a picture of how that business is doing when it announced third-quarter results before the market opened on Tuesday. Here are the highlights from CVS Health's quarterly update.
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CVS Health results: The raw numbers
Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
Sales | $47.3 billion | $46.2 billion | 2.4% |
Net income from continuing operations | $1.39 billion | $1.29 billion | 8.2% |
Adjusted earnings per share (EPS) | $1.73 | $1.50 | 15.3% |
Data source: CVS Health.
What happened with CVS Health this quarter?
CVS Health makes over 70% of its revenue from its pharmacy services segment, which includes the company's pharmacy benefits management (PBM) business. In past years, the pharmacy services segment was usually the bright spot for CVS. That hasn't been the case in recent quarters, though. The third quarter was no exception.
Pharmacy services revenue in the third quarter totaled $33.8 billion, up 2.6% from the prior-year period. This modest increase stemmed from growth in CVS Health's pharmacy network and mail choice claim volume as well as higher drug prices.
Revenue for the company's other segment, retail/long-term care (LTC), jumped 6.4% year over year to $20.9 billion. The two primary components of the segment's revenue are its retail pharmacies (including the Omnicare LTC pharmacy business) and retail front-store sales. Pharmacy same-store sales rose 8.7%, boosted by solid prescription volume growth. Front-store comps increased 0.8% over the prior-year period, with the slight uptick driven by CVS Health's consumer healthcare and beauty care categories.
CVS Health lowered the bar for the third quarter three months ago, setting expectations for lower operating profit. The company met those lower expectations, with consolidated operating profit dropping 5.8% -- in the middle of its previous guidance for a decline between 4.5% and 7%.
The solid year-over-year increase in GAAP net income during the third quarter stemmed primarily from the boost of lower income taxes. CVS Health's adjusted EPS of $1.73 came in at the upper end of the company's previous guidance range, helped by lower income taxes also.
CVS Health's most important development during the third quarter, though, was the company's preparations for its pending acquisition of Aetna. The company has been busy securing approvals from 23 of the 28 states needed to finalize the deal. The U.S. Department of Justice gave its approval for the Aetna acquisition on Oct. 10.
What management had to say
CEO Larry Merlo said:
Strong revenue and adjusted EPS, along with significant cash flow year to date, demonstrate our success in driving value. 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.
Looking forward
CVS Health still expects full-year 2018 GAAP diluted EPS between $1.40 and $1.50. The company also maintained its guidance for adjusted EPS for the year between $6.98 and $7.08.
The most important thing for investors to watch with CVS Health now is the acquisition of Aetna. This transaction is expected to close before Thanksgiving. CVS Health now believes that the two-year synergies from the deal will be greater than the $750 million initially envisioned.
Over the longer run, the company thinks that the addition of Aetna will enable it to control healthcare costs by managing chronic conditions more effectively. If CVS Health achieves this goal, the company should be able to navigate the rapidly changing dynamics in the pharmacy industry better than most.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
