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Acquisitions Drive CVS Health Inc.'s Q1 Revenue Higher

By Brian Feroldi - May 5, 2016 at 2:44PM

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The pharmacy retail giant posts strong revenue growth during the quarter, but declining margins caused profit growth to remain tepid.

CVS Health (CVS 1.10%) reported its first-quarter financial results before the market opened on Tuesday. Investors were expecting the company to post strong growth in its top line during the quarter, after it made a handful of major acquisitions last year that greatly expanded its already vast empire.

Let's look at how the company's results played out during the period and see how management performed in the three areas that I suggested investors should pay attention to.

CVS Health Q1: The raw numbers

MetricQ1 2016Q1 2015Change
Revenue $43.2 billion $36.3 billion 18.9%
Adjusted net income  $1.30 billion $1.29 billion 1%
Adjusted EPS $1.18 $1.14 4%


1. The headline numbers
Revenue jumped by a huge 18.9% during the period, above the high end of the 17% to 18.5% range management had predicted. As expected, though, the company wasn't able to translate all of its strong top-line growth into profits during the quarter, with margins taking a step back. 

Here's David Denton, CVS Health's CFO, giving investors more color on the cause of the margin decline: "Forty percent of the downdraft in that -- the margin was related to the mix of the business that we acquired. The remainder of that is largely the effect of the reimbursement pressure within the marketplace."

It looks as if the Target and Omnicare acquisitions are playing their part in the margin decline, but the biggest cause is general reimbursement pressure. But on the plus side, the stronger-than-expected revenue growth still allowed the company to produce $1.18 in adjusted earnings per share, which was a penny above the high end of management's forecast.

2. Did CVS Health gain market share?
CVS Health's pharmacy benefits management business, or PBM, looks to have had a solid quarter. Net business wins for the period were $13.1 billion, up $400 million from their last update, and management said the upside growth it's seeing is coming from new health plan clients. 

The company is also doing a great job at keeping the customers it already has, with a 97.3% retention rate. 


The company's quarterly PBM revenue came in at $28.8 billion, up 20.5% versus the same time last year. CVS Health credited the growth to acquisitions, but it also saw healthy volume growth during the period. Its specialty pharmaceutical business grew 23% during the quarter, which easily outpaced the growth in the overall market.

The company's retail pharmacy business also performed well, posting a revenue boost of 18.6% to $20.1 billion. The primary growth driver was the Target pharmacy acquisition, but same-store sales ticked up a strong 4.2% during the quarter.

That growth easily outpaced the market, and CVS Health believes its retail market share now stands at 23.9%, up 245 basis points from the same time last year. 

Management also confirmed that it's on schedule to convert all of the Target pharmacies to the CVS Pharmacy brand by the end of the summer. CEO Larry Merlo updated investors on the timing of the marketing rollout, which is designed to convert existing Target customers into CVS Health customers: "You won't see any broad-based marketing until we've completed the integration activities. So that, in terms of awareness and all of those things that ultimately drive utilization, you won't see that until the fall time frame."

3. Did it take advantage of its weak share price?
The sharp market decline to start the year caused CVS Health's share price to drop dramatically. Management, however, took advantage of the drop, spending $2.1 billion to buy back 22.4 million shares share during the quarter. That's more than half of the $4 billion that the company had planned to spend on repurchases throughout the year. 

Looking ahead
In its forecast for the next quarter, management sees many of the same dynamics from this quarter playing out. It's projecting revenue growth of at least 18.5% in the second quarter, and margins are expected to continue to weigh on profitability. Adjusted earnings are predicted to land between $1.28 and $1.31.

The picture continues to look bright for the full year, with projections of 2016 revenue growth in a range of 17.5% to 19%, while the margin drag is expect to ease over time. Management still sees adjusted earnings-per-share growth of at least 11% in 2016, reaffirming its guidance range of $5.73 to $5.88. 

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