Senior executives reaffirm growth strategy at CVS Analyst Day

NEW YORK — CVS Health’s integrated pharmacy care model makes it a “partner of choice” in the health care arena, president and chief executive officer Larry Merlo said at the company’s annual Analyst Day event in Manhattan.

Larry Merlo

Merlo and senior CVS Health executives gathered in New York on Thursday to give the investment community an in-depth look at the company’s long-term growth strategies.

At the CVS Analyst Day event, the company also reaffirmed its guidance for adjusted earnings per share (EPS). In its third-quarter financial report last month, CVS lowered and narrowed its fiscal 2016 EPS outlook and said its fiscal 2017 guidance reflects an expected loss of more than 40 million retail prescriptions due to health care market shifts and narrower pharmacy networks.

“By making care more affordable, accessible and effective, we can deliver value to all health care stakeholders, allowing us to be a partner of choice as they look to achieve their health care goals. Despite all the changes happening in health care, success will ultimately be determined by how effective you are at executing on these three objectives. And we remain confident that CVS Health is well-positioned to deliver on all three,” Merlo told analysts at the event.

He noted that CVS Health — with its retail pharmacy, pharmacy benefit management and in-store clinic businesses, supported by cutting-edge research and technology — has “the most extensive suite of enterprise assets” and “each one would be market-leading” on its own.

“Yet what really sets them apart is our ability, largely through technology, to integrate pharmacy care from the payor to the provider to the patient,” Merlo explained. “We own the last mile of service in the delivery of health care. If you think about all of our enterprise assets, each one delivers care directly to the health care consumer. And keep in mind that retail pharmacy is quite often the front door to health care, with the highest frequency of patient interaction. The face-to-face interactions between patients and our 30,000 pharmacists and clinicians provide us with an unmatched ability to help change consumer behavior and drive better health outcomes at a lower cost.

“With increasing consumerism and what we call the ‘retailization’ of health care, improving clinical outcomes and patient satisfaction is of significant value to our health care partners,” he added.

CVS projects adjusted EPS of $5.77 to $5.83 for fiscal 2016 and $5.77 to $5.93 for 2017. The guidance includes the completion of $5 billion in share repurchases in 2017, the company said.

“We have a proven track record of success in meeting our long-term growth targets, and we are targeting, on average, 10% growth in adjusted EPS longer term,” executive vice president and chief financial officer Dave Denton told analysts. “We also expect $7 billion to $8 billion of cash to be available annually for enhancing shareholder value.”

For 2016 and 2017, guidance for GAAP diluted EPS from continuing operations has been lowered to reflect $35 million asset impairment and $230 million lease obligation charges for store rationalization from an enterprise streamlining initiative, CVS said. GAAP diluted EPS is now forecast at $4.82 to $4.88 in 2016 ($4.84 to $4.90 previously) and $5.02 to $5.18 in 2017 ($5.16 to $5.33 previously).

Analysts, on average, project CVS’ adjusted EPS at $5.81 for 2016, with estimates ranging from a low of $5.78 to a high of $5.84, according to Thomson Reuters. For 2017, their consensus estimate for CVS’ adjust EPS is $5.87, running from a low of $5.81 to a high of $5.95.

“Given the recent changes in the marketplace and our outlook for 2017, we have put a plan in place to return to more robust levels of growth,” Denton added. “One element of this plan relates to our multiyear enterprise streamlining initiative, which aims to further improve productivity and to solidify the company’s low-cost provider status. We expect to deliver approximately $700 to $750 million in annual savings across the enterprise by 2021, with cumulative savings of nearly $3 billion over the next five years. This will also free up capital for strategic investments that can help drive the continued growth and success of the enterprise.”

Analyst Day also saw CVS announce an 18% increase ($2 per share) in its annual dividend for 2017, up 30 cents per share versus 2016 and the company’s 14th straight year with a dividend increase. And including a $15 billion share repurchase authorization announced last month, CVS said it has more than $18 billion authorized for stock buybacks over the next few years.

For investors, CVS Health’s retail pharmacy and PBM contract losses may create an “overhang” going through 2017, according to Jeffries analyst Brian Tanquilut.

“CVS’ retail pharmacy contract losses — i.e. exclusion from Prime [Therapeutics] and TRICARE, which translate into more than 40 million lost prescriptions, as well as the derivative impact of reduced store traffic on front-end sales — will prevent it from delivering the EPS upside necessary to reignite near-term stock momentum,” Tanquilut wrote in a research note released Monday. “We believe the loss of scripts is not quickly reversible and, as such, will also impact CVS’ near-term EPS growth.”

This year, CVS lost PBM contracts with CalPERS, Texas Employees and General Electric to UnitedHealth Group’s OptumRx, he noted. “While the impact of these three contracts is minimal, investors are concerned that Optum could target more of CVS’ contracts once the 2018 selling season begins. Coupling this with Express Scripts’ recent comments about raising their contract retention target suggests increasing competitiveness in the PBM space that will keep investors concerned about CVS’ PBM contracts,” he explained.

CVS Health has about a 24% share of the PBM market, compared with 29% for Express Scripts and 22% for OptumRx, Tanquilut reported, citing Jeffries estimates and Pembroke Consulting research. He noted that retail pharmacy rival Walgreens Boots Alliance has long-term network relationships with more than 55% of the PBM market and that the remaining major PBMs without a preferred pharmacy partner are Humana (estimated 64 million prescriptions), MedImpact (55 million scripts) and US Script/Centene (21 million scripts).

Also in his report, Tanquilut said he expects CVS Pharmacy to buy some of the stores to be divested by Walgreens Boots Alliance as it works with the Federal Trade Commission to close its $17 billion deal to acquire Rite Aid Corp.

“We expect WBA to finalize divestiture agreements to meet FTC requirements for its Rite Aid deal in the next month, and CVS will likely
acquire assets for geographic fill-in purposes,” Tanquilut stated.

Industry observers have cited CVS, Kroger, Albertsons, Fred’s and private equity firms as among the parties showing interest in stores to be sold with the Walgreens-Rite Aid merger.