10-QPeriod: Q1 FY2019

CVS HEALTH Corp Quarterly Report for Q1 Ended Mar 31, 2019

Filed May 1, 2019For Securities:CVS

Summary

CVS Health Corporation reported a significant increase in total revenues for the first quarter of 2019, reaching $61.6 billion, up 34.8% year-over-year. This growth was largely driven by the Aetna acquisition completed in November 2018, which significantly boosted the Health Care Benefits segment. Despite revenue growth, the company faced challenges in its traditional segments. Pharmacy Services and Retail/LTC segments experienced price compression and reimbursement pressures, leading to a decrease in adjusted operating income for Pharmacy Services and a more substantial decline for Retail/LTC. The company is actively managing these pressures through cost reduction efforts and new product initiatives, aiming to navigate this transition year and build towards long-term growth.

Financial Highlights

56 data points
Beta

Revenue

$61.65B

39.6% Gross Margin

Net Income

$1.42B

2.3% Net Margin

EPS (Diluted)

$1.09

Total Assets

$219.77B

Cash & Equivalents

$5.90B

Free Cash Flow

$1.23B

Financial Statements
Beta
Revenue$61.65B
Cost of Revenue$37.25B
Gross Profit$24.40B
Operating Expenses$58.96B
Operating Income$2.69B
Interest Expense$782.00M
Net Income$1.42B
EPS (Basic)$1.09
EPS (Diluted)$1.09
Shares Outstanding (Basic)1.30B
Shares Outstanding (Diluted)1.30B

Key Highlights

  • 1Total revenues surged by 34.8% to $61.6 billion, primarily due to the Aetna acquisition.
  • 2The Health Care Benefits segment saw substantial revenue growth, significantly impacted by the Aetna acquisition.
  • 3Pharmacy Services segment revenues grew by 3.1% to $33.6 billion, driven by increased claims volume and brand name drug inflation, though adjusted operating income declined by 4.2% due to price compression.
  • 4Retail/LTC segment revenues increased by 3.3% to $21.1 billion, but adjusted operating income saw a significant decline of 18.9% due to reimbursement pressures, increased operating expenses including a store rationalization charge, and challenges in the long-term care business.
  • 5Operating income increased by 34.8% to $2.7 billion, largely attributed to the Aetna acquisition, despite pressures in other segments.
  • 6Net income attributable to CVS Health rose by 42.4% to $1.42 billion ($1.09 per diluted share), reflecting the impact of the Aetna acquisition.
  • 7The company adopted the new lease accounting standard (ASC 842) effective January 1, 2019, which added significant operating lease right-of-use assets and liabilities to the balance sheet.

Frequently Asked Questions

The primary driver of the significant revenue increase was the acquisition of Aetna Inc., which was completed in November 2018. This acquisition substantially increased the size and scope of the Health Care Benefits segment.

Both segments are experiencing ongoing pharmacy reimbursement pressure and price compression. The Pharmacy Services segment also faces competitive pressures in the PBM industry leading to a larger share of rebates being shared with clients. The Retail/LTC segment is further impacted by industry challenges in the long-term care space and higher operating expenses, including a store rationalization charge and investments in wages and benefits.

The Aetna acquisition significantly boosted total revenues and operating income, primarily within the Health Care Benefits segment. It also led to an increase in interest expense due to associated financing activities and a substantial increase in operating expenses due to intangible asset amortization and integration costs. The balance sheet reflects the assets and liabilities of Aetna, including a significant increase in total assets and total liabilities.

CVS Health views 2019 as a transition year focused on integrating the Aetna acquisition and executing its growth strategy. The company expects to exceed its 2020 synergy targets for the Aetna acquisition but anticipates adverse impacts on its Pharmacy Services and Retail/LTC segments due to ongoing reimbursement pressures and other industry challenges. They are implementing actions such as new product initiatives, a new PBM client contracting model, and cost reduction efforts to address these challenges.