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CVS' Merlo: Health reform to benefit business in 2014

CVS Caremark posts 'solid' Q3 results, boosts guidance

WOONSOCKET, R.I. — CVS Caremark, which posted solid third-quarter results across its enterprise, is well-positioned to benefit from the rapidly changing healthcare environment. That was a key message that CVS Caremark president and CEO Larry Merlo had for analysts Tuesday morning during the company’s third-quarter conference call.

“The healthcare environment is changing rapidly, and there are certainly a number of moving parts from the Patient Protection and Affordable Care Act to the private exchanges. Collectively, we expect changes within this environment to be a net positive for our business in 2014,” Merlo told analysts.

To drive growth and take advantage of the evolving landscape, the pharmacy retailer will participate in coverage expansion in the public exchanges, and also will participate in the private exchange market for both active employees and retirees.

He noted that, as the No. 1 PBM player in the managed Medicaid space, the company also is well-positioned to gain share through Medicaid expansion.

What will this mean for PBM margins? Merlo acknowledged that while it does expect to see some churn in PBM lives and perhaps some margin compression, it expects this to be mitigated by such cost-management tools as narrow networks, its Maintenance Choice offering, etc. The bottom line: The company does not expect a material impact on PBM margins in the “foreseeable future.”

“In addition to tighter pharmacy management tools, we also expect share gains from both market expansion and market churn as an additional lever to help offset PBM margin compression,” Merlo added.

Another boon for CVS Caremark is that its opportunities as it relates to healthcare reform extend beyond just its PBM business.

“Leveraging our retail footprint, we can support health plan marketing initiatives ranging from limited pilot marketing programs to full-scale educational programs. In fact, over the next six months we expect health plans to host more than 6,000 marketing events in more than 1,000 of our stores across 20 states.”

Strong results drive revised 2013 guidance

For the quarter ended Sept. 30, net revenues rose 5.8% to $32 billion compared with the year-ago period.

Net income totaled $1.25 billion, or $1.02 per share, compared with $1 billion, or 79 cents per share, in the year-ago period. Excluding a gain from a legal settlement, adjusted earnings per share rose 23.9% to $1.05.

Revenues in its pharmacy services segment rose 7.8% to $19.5 billion in the quarter. The 2014 selling season proved “strong” for its PBM business as it has completed 75% of renewals to date and has a 96% retention rate, Merlo told analysts. Net new business totaled about $1.8 billion.

Within specialty pharmacy, revenues rose about 22% year over year. Driving the growth: drug price inflation, utilization, new product launches and new PBM clients.

It is interesting to note that, to further differentiate its offerings, the company is leveraging its brick-and-mortar stores to pilot a specialty pharmacy delivery offering.

“What we’ve been able to do is take all of our specialty capabilities and connect to our retail stores. So, now members that want to get access to specialty medications can go in any one of our 7,400 stores as we roll this program out next year,” Jon Roberts, EVP and president of CVS Caremark Pharmacy Services, told analysts during the call. “We will leverage all of the back-end clinical capabilities, the billing capabilities, the fulfillment capabilities and then we will be able to deliver that prescription either to the member’s home — like what happens today with specialty pharmacy — or deliver it to their local CVS/pharmacy. Similar to Maintenance Choice, half of the people want to pick up their specialty prescription in their CVS local store and the other half want it mailed to their home.”

Meanwhile, the retail business posted a revenue increase of 5% to $16.3 billion. Same-store sales rose 3.6%. Pharmacy same-store sales increased 5.7%, while front-end same-store sales slipped 1% due to softer foot traffic. The company noted that, despite slower foot traffic, both front-store basket size and front-store margin improved “modestly” during the quarter.

Given the company’s strong operating results to date and its outlook for the remainder of the year, the company has raised and narrowed its earnings guidance for 2013. It now expects adjusted earnings per share to be between $3.94 and $3.97 in 2013. This compares with its prior guidance of $3.90 to $3.96 per share.

“We are pleased with our strong third-quarter results and optimistic about the outlook for this year and next. We see the evolving healthcare environment as an opportunity for growth, and we believe we are very well-positioned to gain market share across the enterprise,” Merlo said.

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