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CVS Health reports strong profits in Q1, raises forecast.

WOONSOCKET, R.I. -- CVS Health reported a 42% increase in profit for the first quarter ended March 31 and raised its adjusted earnings forecast for the year, as it benefits from its $69 billion purchase of health insurer Aetna.

"We generated strong first quarter results, providing positive momentum to start the year. Following the close of our Aetna acquisition in late November, our first full quarter of combined operations was a success in many ways, " said president and chief executive officer Larry Merlo. "In the quarter we continued to advance our integration efforts while beginning to launch new innovations such as our HealthHUB concept stores. With our differentiated collection of health care assets we are uniquely positioned to lead the transformation of the U.S. health care system. We remain relentlessly focused on creating value for clients and customers while driving both near and longer-term returns for our shareholders."

Effective for the first quarter of 2019, the company realigned the composition of its segments to correspond with changes to its operating model and how the business is managed. With the realignment, the company's SilverScript Medicare Part D prescription drug plan (PDP) moved from the Pharmacy Services segment to the Health Care Benefits segment. In addition, the drug chain moved the mail order and specialty pharmacy operations of Aetna, which it acquired on November 28, 2018, from the Health Care Benefits segment to the Pharmacy Services segment. Prior-period segment financial information has been retrospectively adjusted to conform with the current-period presentation.

Revenues and adjusted revenues increased 34.8% and 34.9%, respectively, for the three months ended March 31 compared to the prior-year quarter. Revenue growth was primarily driven by the Aetna acquisition, as well as increased volume and brand name drug price inflation in both the Pharmacy Services and Retail/Long-Term Care segments. The increase was partially offset by continued price compression in the Pharmacy Services segment, reimbursement pressure in the Retail/LTC segment and an increased generic dispensing rate.

Operating expenses and adjusted operating expenses increased 67.9% and 60.6%, respectively, for the quarter, primarily driven by the impact of the Aetna acquisition. The hike in operating expenses was also due to an increase in intangible amortization related to the Aetna acquisition, a $135 million store rationalization charge recorded during the first quarter primarily related to operating lease right-of-use asset impairment charges in connection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter, and an increase in acquisition-related integration costs. The increase in operating expenses was partially offset by the absence of the $86 million pretax loss that was associated with the divestiture of the company's RxCrossroads subsidiary recorded in the three months that ended March 31, 2018.

Operating income and adjusted operating income increased 34.8% and 56.8%, respectively, for the first quarter compared to the prior-year period. The in creases were primarily due to the Aetna acquisition, partially offset by reimbursement pressure and the investment of a portion of the savings from tax reform in wages and benefits in the Retail/LTC segment and continued price compression in the Pharmacy Services segment. The increase in operating income was also partially offset by the other increases in operating expenses described above.

Pharmacy Services segment results for the three months ended March 31 were as follows:

* Total revenues increased 3.1%, primarily due to brand name drug price inflation as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.

* Total pharmacy claims processed increased 2.8% on a 30day equivalent basis, primarily driven by net new business and the continued adoption of Maintenance Choice offerings.

* Operating income and adjusted operating income decreased 5.7% and 4.2%, respectively, primarily driven by continued price compression and investments related to the company's agreement with Anthem Inc. during the quarter. The decrease in operating income also was due to increased intangible amortization related to Aetna's mail order and specialty pharmacy operations.

Retail/LTC segment results for the three months ended March 31 were as follows:

* Total revenues increased 3.3%. The increase was primarily driven by higher prescription volume and brand-name drug price inflation, partially offset by continued reimbursement pressure and the impact of generic drug introductions.

* Front-store revenues, which represent approximately 22.7% of total Retail/LTC segment revenues, increased in the period, primarily driven by growth in health product sales.

* Total prescription volume grew 5.5%, on a 30-day equivalent basis. The growth was driven mainly by the continued adoption of patient care programs, collaborations with PBMs and the company's preferred status in a number of Medicare Part D networks.

Health Care Benefits segment results for the three months ended March 31 were as follows:

* Total revenues increased $16.6 billion, primarily driven by the Aetna acquisition, reflecting strong membership growth in the Health Care Benefits segment's Medicare products.

* Operating income and adjusted operating income increased $1.3 billion and $1.7 billion, respectively, primarily driven by the Aetna acquisition. The increase in operating income was partially offset by an increase in intangible amortization related to the Aetna acquisition.

CVS revised its full-year 2019 consolidated GAAP operating income guidance range to $11.8 billion to $12.0 billion from $11.7 billion to $12.1 billion and narrowed and raised the midpoint of the guidance range for full-year adjusted operating income to $15.0 billion to $15.2 billion from $14.8 billion to $15.2 billion.

Caption: Larry Merlo
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Title Annotation:Business
Publication:Chain Drug Review
Article Type:Financial report
Date:May 13, 2019
Words:917
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