CVS Health Corporation's Prescription Growth Outweighs Long-Term Care Woes

When CVS Health Corporation (NYSE: CVS) reported its first-quarter results in May, there was a reversal of sorts. The company's pharmacy services segment, which includes its pharmacy benefits management (PBM) business, usually generates faster growth than the retail/long-term care (LTC) segment does. But it was the other way around in the first quarter.

CVS Health announced its second-quarter earnings results before the market opened on Wednesday. The company again posted better-than-expected earnings thanks to retail/LTC segment growth but faced a problem with its LTC business. Here are the highlights from CVS Health's second-quarter update.

Smiling pharmacist interacting with pharmacy customer

Image source: Getty Images.

CVS Health results: The raw numbers

Metric Q2 2018 Q2 2017 Year-Over-Year Change
Sales $46.7 billion $45.7 billion 2.2%
Net income from continuing operations ($2.6 billion) $1.1 billion N/A
Adjusted earnings per share (EPS) $1.69 $1.33 27.1%

Data source: CVS Health.

What happened with CVS Health this quarter?

CVS Health's year-over-year revenue growth slowed a bit in the second quarter. This wasn't a surprise , however, considering that the week prior to the Easter holiday fell in the first quarter this year and in the second quarter in 2017. CVS Health's stores typically enjoy strong sales in the days leading up to Easter.

The calendar didn't hurt the company too much, though. CVS Health's retail/LTC segment posted first-quarter revenue of $20.7 billion, up 5.7% from the prior-year period. Although the Omnicare LTC pharmacy business continued to struggle, CVS Health's retail stores performed exceptionally well in the quarter.

As expected, front-store same-store sales declined 1% year over year largely due to the impact of the timing of the Easter holiday. But pharmacy prescription volume jumped 9.5% from the prior-year period, helping drive overall same-store sales year-over-year growth of 5.7%. Factors contributing to the higher prescription volume include continued success for CVS Health's patient care programs, alliances with health plans and other PBMs, inclusion in more Medicare Part D networks, and higher brand drug prices.

The company's pharmacy services segment generated more modest growth. Revenue for the segment increased 2.8% year over year in the second quarter to $33.2 billion. This increase stemmed primarily from growth in CVS Health's pharmacy network, higher mail choice claims volume, and higher brand drug prices. However, continued price compression and higher generic dispensing rates held back growth.

What's behind CVS Health's second-quarter GAAP net loss? The company recorded a goodwill impairment charge of $3.9 billion because of the weak performance of its Omnicare LTC business. Omnicare continues to face a negative business climate in the LTC industry.

CVS Health's non-GAAP adjusted EPS excluded the negative impact of this goodwill impairment charge. Adjusted EPS also received a big boost from lower tax rates resulting from U.S. corporate tax reform.

What management had to say

CVS Health CEO Larry Merlo stated:

Our solid performance both in the quarter and year-to-date demonstrates our ability to drive value. It also builds upon a strong foundation for a seamless integration of CVS and Aetna with one goal: to transform the consumer healthcare experience and, by doing so, deliver long-term profitable growth for shareholders.

Merlo also put in a plug for CVS Health's pending acquisition of health insurer Aetna (NYSE: AET) , adding:

The strong revenue, adjusted EPS, gross and operating margins, along with cash flow generated in the quarter were the direct result of our team's ability to increase prescription growth by expanding relationships with PBMs and health plans as well as our ongoing streamlining efforts and innovation. The genuine enthusiasm and the depth of talent throughout the CVS and Aetna organizations will be key assets as we focus on realizing the potential of our combination.

Looking forward

The company's third-quarter results aren't likely to be as positive as its second-quarter performance. CVS Health expects its third-quarter GAAP operating profit will drop between 4.5% and 7% below the prior-year period. Adjusted consolidated operating profit is expected to decline between 2.5% and 5% year over year. The company projects that third-quarter adjusted EPS will be between $1.68 and $1.73.

CVS Health also updated its full-year 2018 guidance. The company expects GAAP EPS between $1.40 and $1.50, well below the previous outlook of GAAP EPS between $5.11 and $5.32. This significant downward revision is due to the impact of the LTC goodwill impairment charge taken in the second quarter.

Furthermore, the company narrowed its full-year 2018 adjusted EPS guidance. It now expects adjusted EPS between $6.98 and $7.08. The upper end of the range is the same as its previous guidance, but the lower end of the range is higher than the prior projection of $6.87.

The biggest thing for investors to look forward to is the potential finalization of CVS Health's acquisition of Aetna. CVS Health anticipates that the deal will close either in the third quarter or early fourth quarter of 2018.

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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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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