Image Source: CVS Health

Three months ago, CVS Health (NYSE:CVS) reported solid second-quarter results but disappointed investors with its full-year outlook. The giant pharmacy retailer and pharmacy benefits manager (PBM) announced its third-quarter results before the market opened on Friday. Were investors disappointed yet again? 

CVS Health results: The raw numbers


Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)


$38.6 billion

$35.0 billion


Net Income From Continuing Operations

$1.2 billion

$948 million






Source: CVS Health

What happened with CVS Health this quarter?
CVS achieved double-digit year-over-year growth in the third quarter due to several factors:

  • Growth in specialty pharmacy and pharmacy network claims helped drive CVS Health's PBM revenue up 13.3% year-over-year. The higher levels of pharmacy network claims was due to new customers and growth in the company's managed Medicaid business.
  • The acquisition of Omnicare contributed roughly half of the 6.9% year-over-year growth in CVS Health's retail/long-term care business unit. 
  • Pharmacy same store sales were weighed down around 450 basis points by the introduction of new generic drugs. 
  • Pharmacy front store same store sales dropped 5.8% compared to the prior year period. CVS Health's decision to remove tobacco products from its shelves was the culprit behind this decline. The company estimates that front store same store sales would have increased by 490 basis points excluding the impact of this change.

Despite picking up new PBM customers and the addition of Omnicare, CVS Health's revised guidance didn't change significantly from last quarter. The company raised the low end of its full-year adjusted earnings outlook to $5.14 per share from $5.11 per share. However, the upper end of the full-year outlook stayed at $5.18 per share.

CVS also peeked into the future a bit more with a preliminary 2016 outlook. The company projects adjusted earnings will be between $5.68 and $5.88 per share -- a 10%-14% increase from this year.

What management had to say
While some investors might not be happy about CVS Health's less-than-inspiring 2015 guidance, company management presented the third-quarter results in a positive light. CEO Larry Merlo noted that the third-quarter results were "at the higher end of our expectations". He added that CVS anticipates "significant growth in the fourth quarter, rounding out another terrific year".

Merlo also highlighted two key opportunities, both related to acquisitions. First, he expressed optimism about the long-term care business potential gained through the Omnicare buyout. He also stated that CVS looks forward to closing on the acquisition of Target's pharmacy business. Merlo predicted that the Target acquisition would "enable us to reach more patients, add a new retail channel for our unique offerings, and expand convenient options for consumers".

Looking forward
Investors certainly will want to watch closely how well these two acquisitions perform for CVS. However, they should also watch how the company is affected by a major acquisition by a big rival -- Walgreens Boots Alliance (NASDAQ:WBA).

Walgreens recently announced plans to buy fellow drugstore chain Rite Aid (NYSE:RAD) for $17 billion. The deal would combine Rite Aid's 4,600 stores with Walgreens' 8,200 stores, although some stores could be closed with the merger. By comparison, CVS has around 7,800 stores. CVS will add another 1,600 or so stores with the Target acquisition.

All of this merger and acquisition activity highlights the fierce battle going on in the retail pharmacy industry. It's too early to know for sure what the impact will be for CVS Health -- but how well the company adapts will be key to its future success.