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Major changes are occurring in the pharmaceutical industry. CVS Health Corporation (NYSE: CVS) provides a good example. Among other things, the pharmacy services giant acquires a health insurer Aetna (NYSE: AET) megadeal and experiment with a new rewards program for members to differentiate themselves from rivals.
Despite all these important changes, CVS Health still needs to manage its daily activities. The company provided a picture of the situation in this sector by announcing its third quarter results before the opening of the market on Tuesday. Here are the highlights of the quarterly update of CVS Health.
Source of the image: Getty Images.
CVS Health results: raw numbers
| Metric |
Q3 2018 |
Q3 2017 |
Change from one year to the next |
|---|---|---|---|
|
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 derives more than 70% of its revenues from its pharmacy services business, which includes the company's pharmacy benefit management business. In recent years, the pharmacy services segment has generally been the bright spot for CVS. This has not been the case in recent quarters, however. The third quarter was no exception.
Pharmaceutical services revenues in the third quarter totaled $ 33.8 billion, up 2.6% from the same period a year earlier. This modest increase stems from the growth of CVS Health's pharmacy network and the number of mail selection claims and rising drug prices.
Revenues for other business segments, retail and long-term care, jumped 6.4% from a year ago to $ 20.9 billion. The two main components of the segment's sales are retail pharmacies (including the Omnicare LTC pharmacy business) and in-store retail sales. Same store sales at the pharmacy were up 8.7%, driven by strong order volume growth. In-store sales rose 0.8% from a year earlier, due to a slight increase due to CVS Health's consumer health care and beauty categories.
CVS Health lowered the bar for the third quarter three months ago, setting expectations for lower operating profit. The company met these expectations, with consolidated operating income down 5.8%, in the midst of its previous forecast, which was down 4.5% to 7%.
The strong year-over-year increase in GAAP net income in the third quarter is mainly due to lower income taxes. Adjusted EPS of $ 1.73 from CVS Health was at the top of the company's previous guidance range, helped also by a reduction in income tax.
The most significant development of CVS Health in the third quarter, however, was the company's preparations for its imminent acquisition of Aetna. The company has been striving to obtain approvals from 23 of the 28 states required to finalize the transaction. The US Department of Justice approved the acquisition of Aetna on October 10.
What management had to say
CEO Larry Merlo said:
High revenues and adjusted EPS, as well as significant year-to-date cash flows, demonstrate our success in creating value. Our year – to – date results continue to confirm our confidence in the strength of our model. As we near the completion of our Aetna transformative acquisition, our integration teams are making significant progress in ensuring that once final approvals are obtained, we can begin to execute our integration plans.
Looking forward to
CVS Health still expects GAAP-diluted EPS for the year 2018 of 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 acquisition of Aetna is the most important thing for investors to watch with CVS Health. This transaction should be closed before Thanksgiving. CVS Health now believes that the two-year synergies from the agreement will be greater than the $ 750 million originally envisioned.
In the long term, the company believes that the addition of Aetna will enable it to control health care costs by managing chronic diseases more effectively. If CVS Health achieves this goal, the company should be able to handle the rapidly evolving dynamics of the pharmaceutical sector better than anyone else.
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