PBM Business Powers CVS Health's Success in Q2

By Markets Fool.com

Image source: Getty Images.

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Was the second quarter of 2016 as good as the first quarter for CVS Health(NYSE: CVS)? Last time around, the pharmacy services company posted solid results thanks largely to strong prescription volume growth. CVS announced its second-quarter results before the markets opened on Tuesday. Here are the highlights.

CVS Health results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Sales

$43.7 billion

$37.2 billion

17.%

Net income from continuing operations

$924 million

$1.27 billion

(27.4%)

Earnings per diluted share

$0.86

$1.12

(23.2%)

Data source: CVS Health.

What happened with CVS Health this quarter?

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How did revenue grow at a solid pace while CVS Health's bottom line declined compared to the prior-year period? The biggest factor was paying off $542 million of debt early. CVS also had $114 million more in interest expense during the second quarter of 2016 versus the same quarter last year due to the issuance of debt to fund its acquisitions of Target's pharmacies and clinics, as well as Omnicare. The company also reported $81 million more in integration costs related to these acquisitions.

The good news is that non-GAAP earnings per share, which exclude the early debt retirement and acquisition-related integration costs as well as intangible amortization costs, grew to $1.32 from $1.22 in the prior year period. That increase topped investors' expectations.

Other highlights of CVS Health's second quarter included:

  • Pharmacy services segment revenue increased by 20.7% year over year to $29.5 billion. This increase for the company's pharmacy benefits management (PBM) unit was primarily due to higherpharmacy network claim volume and growth in specialty pharmacy business.
  • Pharmacy network claims processed in the quarter were 22.6% higher than the prior-year period, primarily because of gaining additional business.
  • Retail/long-term care segment revenue rose 16% to $20 billion, driven largely by the Target pharmacy and clinic and Omnicare acquisitions.
  • Same-store sales increased 2.1% from the second quarter of 2015, with pharmacy same-store sales growing by 3.9%.
  • Generic dispensing rates grew by 155 basis points to 85.4% in the pharmacy services segment and by 110 basis points to 86.1% in the retail/long-term care segment.

Based on its second-quarter results, CVS Health revised guidance for full-year GAAP earnings per share to$4.92 to $5.00from$5.24 to $5.39. This negative change reflected the early debt retirement and acquisition-related integration costs. However, the company raised and narrowed its adjusted earnings per share estimate for the yearto$5.81 to $5.89from$5.73 to $5.88.

What management had to say

CVS Health's President and CEO Larry Merlo expressed optimism about his company's second-quarter performance:

I'm very pleased with our solid second quarter results across the enterprise. Operating profit in the Retail/LTC Segment was in line with expectations, while operating profit in the Pharmacy Services Segment exceeded expectations. At the same time, we have generated substantial free cash flow year-to-date and continued to return significant value to our shareholders through dividends and share repurchases.

Looking forward

This year has proven to be somewhat disappointing for CVS Health shareholders so far in terms of how the company's stock has performed. However, the second-quarter results give reason for hope that CVS' stock could produce better returns going forward.

Larry Merlo noted that 2017 is "shaping up to be another very successful PBM selling season." One sign of that success is that the CVS Healthpharmacy services segment's sales growth was much stronger than the small year-over-year sales decrease reported in the second quarter by competitorExpress Scripts (NASDAQ: ESRX). However,customer retention for Express Scripts in 2017 is expected to be between 96% and 98%. That high level makes it tougher for CVS Health to peel off customers from its rival PBM. (Although, CVS can also be proud of a similarly high retention rate.)

On the retail/long-term care front, CVS needs to fully leverage its investment in its acquisitions. This process will take time, but should pay off.

Shares of CVS Health didn't move much in early pre-market trading after the announcement of the company's second-quarter results. For long-term investors, though, those results appear to confirm that CVS Health remains on the right track to grow its business for the future.

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Keith Speights owns shares of Express Scripts. The Motley Fool owns shares of and recommends Express Scripts. The Motley Fool recommends CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.