CVS Health (NYSE:CVS) started off 2018 with solid first-quarter results. The company's retail business looked especially good, bolstered by a rough flu season and the Easter holiday. But the first quarter is now in CVS Health's rear-view mirror. What lies ahead for the pharmacy giant?
Larry Merlo, CVS Health's CEO, along with other executives, spoke at length during the company's first-quarter conference call about several initiatives that are under way. Here are five things they said about CVS Health's plans for 2018 and beyond that you'll want to know about.
1. Acquisition activity
Much of the first-quarter call discussion focused on CVS Health's pending acquisition of Aetna (NYSE:AET). Merlo provided an update on what he called the "three very important workstreams" related to the deal: shareholder approval, the regulatory pathway, and integration planning.
The first of those workstreams can now be checked off. Both CVS Health and Aetna shareholders voted to approve the deal with over 95% shareholder approval.
Merlo stated that CVS is working to provide information requested by the U.S. Department of Justice in February. He added that the scope of the request wasn't unexpected. In addition, progress has been made on obtaining state-level approvals. The company continues to expect that the acquisition will close in the second half of 2018.
Regarding integration planning, Merlo said the two organizations are working closely together to ensure a smooth transition, laying the groundwork for achieving projected synergies, and creating a "long-term roadmap for success and growth." He added that "the really exciting part of this transaction is our opportunity to rethink and reinvent healthcare in our country."
One negative aspect of the planned Aetna acquisition, though, is the additional debt CVS Health took on to fund the transaction. Because of the added debt load, CVS suspended its share buybacks and is no longer increasing dividends until it can lower its leverage ratio.
CVS Health CFO Dave Denton said the $40 billion in new debt related to the Aetna acquisition will result in a pro forma trailing-12-month adjusted debt-to-EBITDA ratio of around 4.6 after the deal closes. The company wants to reduce that ratio to around 3.5 over the two years after the close, with a longer-term goal of lowering the leverage ratio to below 3. Denton stated that CVS Health's cash flow and savings from U.S. tax reform should enable the company to achieve these goals.
Investors don't have to be concerned about the additional debt negatively affecting adjusted earnings per share, though. Denton said CVS Health would exclude net interest expense related to the Aetna deal from its non-GAAP metrics beginning in the second quarter. He thinks this change will provide "a clearer picture of our underlying performance until the deal closes."
3. Preparing for another big health insurer
CVS Health estimates that the implementation costs associated with the Anthem contract will be in the neighborhood of $150 million. Denton said that expenses to support the Anthem implementation were relatively small in the first quarter but would "ramp up as the year progresses."
This spending will weigh on profit growth for CVS Health's PBM business for a while. However, the deal will boost revenue and profits once the contract goes into effect.
4. Home hemodialysis
In April, CVS Health announced plans to introduce new home hemodialysis technology. Merlo stated that CVS thinks it can "use the wealth of data available to our enterprise to predict and support diagnosis earlier in the patient's disease course." This could lead to delaying the need for dialysis. And for patients who do need dialysis, he believes that home hemodialysis "has the potential to provide a better patient experience, better health outcomes, and reduce total medical costs."
Merlo said CVS Health plans to begin a trial of its technology later this summer. Trials will take around 18 to 24 months. If all goes well, the company will then seek FDA clearance.
CVS Health COO Jon Roberts noted that around 10% of dialysis occurs in the home today, but only 1% is hemodialysis. While that's a narrow market, Roberts said CVS sees opportunities to expand the market, adding that home dialysis usage in some other countries is 30% to 50%.
5. Virtual care
Another innovative initiative planned by CVS Health is to offer virtual care with its MinuteClinics. Roberts stated that the company plans to launch this service later in 2018.
There will be two approaches used for virtual care. Online visits will be available for limited areas such as birth control, allergies, hair loss, and acne. Video visits will be offered for minor illnesses or injuries, skin conditions, and wellness services.
CVS Health isn't starting from scratch in developing its virtual care services, though. Merlo stated that the company is partnering with telehealth leader Teladoc (NYSE:TDOC). He said CVS will use Teladoc as the engine to provides telehealth services through CVS Health's app. The services will be provided by the company's MinuteClinic as well as other providers. Merlo added that Teladoc is basically "private labeling our telehealth program."
A busy year
As you can tell, CVS Health has a lot on its plate throughout the rest of the year. Some of the company's efforts will no doubt produce short-term pain, especially the impact of the additional debt associated with the Aetna acquisition and the up-front implementation costs related to the Anthem contract. However, all of these plans also hold the potential to generate long-term gains. The downside for investors is that the pains are being experienced now, while any gains won't be realized until down the road.