Make it three in a row for CVS Health (NYSE:CVS)! The large pharmacy retailer and pharmacy benefits manager beat earnings expectations for the third consecutive quarter when it announced fourth-quarter results on Tuesday. Company executives discussed those results with plenty of color commentary during the earnings call. Here are five key things CVS Health's management wants you to know (quotes courtesy of Thomson Reuters StreetEvents).
1. 2014 was great
Practically the first words out of the mouth of CVS Health CEO Larry Merlo were that 2014 "was a great year." It's hard to argue that point.
The company reported record revenue for 2014. Profits were up across the board. And CVS Health generated a boatload of free cash -- $6.5 billion for the year, with $2.9 billion of that coming in the fourth quarter.
The 2015 selling season for CVS' pharmacy benefits management, or PBM, segment was especially encouraging. Around 150 new customers were landed. The total haul for 2015 was $7 billion, with $3.6 billion in net new business. Merlo dubbed it "the largest and most complex welcome season in our history" with "extremely positive" feedback from clients.
2. Specialty business sizzling
Specialty pharmacy business played a huge role in CVS Health's 2014 success story and seems poised to continue to do so for quite a while. Revenue in the fourth quarter was up a whopping 56% year over year.
A couple of key factors aside from simply gaining new customers helped drive this strong growth. CVS Health acquired Coram LLC in early 2014. Coram is one of the nation's largest specialty infusion services providers. Hepatitis C drugs also played an important part in pushing specialty revenue higher.
In January, CVS selected Gilead Sciences' Harvoni and Sovaldi as the exclusive hepatitis C drugs on several of its major formularies. Jon Roberts, president of CVS Health's PBM segment, mentioned that specialty drugs were their clients' "biggest concern." Skyrocketing costs of hepatitis C drugs in 2014 certainly fueled those concerns.
However, when asked if the decision to go with Gilead's drugs stood out as a competitive advantage, both Larry Merlo and Jon Roberts shied away from making that claim. Merlo noted that CVS Health's utilization management also was important along with its formulary in controlling client costs. Roberts added that "formulary is one piece of the strategy," but that the company hasn't "seen that as a factor in the selling season."
3. Tobacco road not too bumpy
CVS Health emptied its stores of tobacco products in September 2014. When the company first announced the decision earlier in the year, it projected that the cost of the move could total $2 billion. So far, the road to becoming the first major pharmacy chain to rid itself of tobacco products hasn't been too bumpy.
For sure, the no-tobacco decision has caused some challenges. The negative impact of the move amounted to around 800 basis points on front store same-store comparisons during the fourth quarter. However, Merlo was quick to point out that amount was around 100 basis points less than expected, and that front store margins have improved as a result of not selling tobacco products.
He also noted that CVS Health appears to have lost tobacco sales primarily to convenience stores and gas stations rather than to rival pharmacy chains. Jon Roberts even stated that his unit is seeing a "halo effect" from clients that appreciate CVS taking a stand like it has.
4. Expansion plans on track
During the fourth quarter, CVS Health opened 50 new stores and closed 7 stores for a total net new store count of 43. For the full year 2014, the company opened a net of 162 new retail stores, including expanding into new markets in Little Rock, AR, and Seattle, WA.
The company also added 35 new CVS Minute Clinic locations in the fourth quarter and 171 during all of 2014. CVS Health plans to open over 100 new clinics in its stores during 2015.
This expansion helps generate revenue, of course, but it also helps CVS Health position itself as a true healthcare leader. Forming alliances with major health systems also aids in this cause. The company now counts 51 partnerships with health systems across the country.
5. Healthy outlook
Management expects 2015 to be yet another good year. CFO David Denton did remark, however, that "the cadence of profit growth is expected to be significantly back-half weighted."
CVS Health plans to buy back $6 billion of shares in 2015. Share repurchases and dividend payments should combine to deliver $7 billion overall to shareholders during the year -- a 30% year-over-year increase in shareholder return.
The company expects to see revenue growth this year between 7% and 8.25%. Earnings are expected to jump by 12.25% to 15.5% year over year during 2015. While investors might not experience another 28% run in share prices like they saw last year, 2015 appears to be shaping up to be a healthy one for CVS Health.
Keith Speights owns shares of Gilead Sciences. The Motley Fool recommends CVS Health and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.
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