CVS Health (CVS +1.38%) executives have readily acknowledged that 2017 is a rebuilding year. The pharmacy giant met expectations in the first two quarters of the year, but those expectations were relatively low after CVS lost two major contracts in the second half of last year. So far this year, CVS Health's pharmacy benefits management (PBM) business has been the main source of good news for the company.
The story remained much the same when CVS Health reported its third-quarter results prior to the market open on Monday. This time around, though, CVS Health had some encouraging news for investors. Here are the highlights from the company's third-quarter update.
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CVS Health results: The raw numbers
| Metric |
Q3 2017 |
Q3 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Sales | $46.2 billion | $44.6 billion |
3.5% |
|
Net income from continuing operations | $1.3 billion | $1.5 billion |
(16.6%) |
|
Adjusted EPS | $1.50 | $1.64 |
(8.5%) |
Data source: CVS Health. EPS = earnings per share.
What happened with CVS Health this quarter?
The pharmacy services segment, which includes CVS Health's PBM unit and several other businesses, again delivered the strongest performance for CVS Health in the third quarter. Revenue for the segment increased 8.1% year over year to $32.9 billion.
Three factors drove pharmacy services revenue higher. First, there was a solid increase in pharmacy network claim volume, due primarily to new business. Second, brand drug prices were higher. And third, CVS Health enjoyed stronger specialty pharmacy volume.
However, the retail/long-term care (LTC) segment continued to struggle. CVS Health reported third-quarter revenue for the segment of $19.6 billion, a 2.7% decline from the prior-year period. Retail/LTC faced the same headwinds that have were problematic in the second quarter, including lower same-store sales, higher generic dispensing rates, and reimbursement pressures. However, while lower same-store sales continued to be negatively impacted by the two major contract losses, in the third quarter CVS Health also felt the effects of three major hurricanes that hit the southern U.S. and Puerto Rico.
CVS Health took a hit on its bottom line as compared to the same quarter in 2016 due to these issues plus the timing of Medicare Part D payments. The federal prescription drug program's risk-sharing corridor, which subsidizes plan sponsors so that they won't avoid less-profitable members who use more prescription drugs, had a big positive impact in the third quarter of 2016 but will help CVS Health more in the fourth quarter this year.
What management had to say
CVS Health president and CEO Larry Merlo highlighted the positives from his company's third-quarter performance. Merlo said:
The solid third-quarter results we posted today keep us well on track to achieve our full-year targets. While operating profit in the retail/LTC segment was impacted by the devastating hurricanes, operating profit in the pharmacy services segment was in line with expectations. At the same time, we continued to deliver substantial free cash flow and return significant value to our shareholders through dividends and share repurchases.
He added:
Given our performance year-to-date and our confidence in our expectations for the remainder of this year, we are narrowing and raising the midpoint of our adjusted EPS guidance for 2017. We remain committed to returning to healthy levels of earnings growth for the total enterprise, and the actions we have taken thus far this year, including our expanded partnerships and new PBM offerings, set us on the right track for growth.
Looking forward
As Larry Merlo stated, CVS Health's outlook for the rest of 2017 is more optimistic than it has been. The company now expects full-year 2017 GAAP diluted EPS between $4.98 and $5.02, up from its prior guidance of $4.92 to $5.02. Adjusted EPS for 2017 are projected to be between $5.87 and $5.91, compared to CVS Health's previous guidance of $5.83 to $5.93.
This translates to fourth-quarter expectations of $1.75 to $1.79 in GAAP EPS, with adjusted EPS between $1.88 and $1.92. If CVS Health hits this guidance, it would reflect a return to year-over-year earnings growth.
The biggest thing for investors to watch in the months ahead is CVS Health's bid to acquire Aetna (AET +0.00%). There are several reasons why this acquisition could pay off for CVS Health's shareholders, although there are also a few hurdles to jump that could prevent a deal from being finalized. If CVS Health is successful in its attempt to buy the large health insurer, 2018 won't be a rebuilding year like 2017 -- it will be a transforming year.
