CVS Health’s revenue increased 2.4% in Q3 2018, to $47.3 billion, marking a solid quarter for the drug retailer as it nears integration with Aetna and pursues greater innovation in healthcare. Third quarter revenues in the Pharmacy Services segment grew 2.6%, rising to $33.8 billion, while revenue in the Retail/LTC segment increased by 6.4% in the quarter, boosted primarily by the pharmacy.
While the CVS/Aetna deal was the main subject of today’s earnings call, CVS senior management also spoke to the state of its retail segment and hinted at plans for its store network. Here are a few key takeaways:
With final approval on Aetna merger nearing completion, CVS plans to build a “revolutionary new model” with the insurance company
While waiting for final approval on the federal and state level, CVS has been busy planning its integration with Aetna. With the insurance company, CVS is focused on innovation in two categories: following through on delivering shorter-term year two synergies, and executing the foundational pieces of their combined healthcare model for longer-term growth.
Regarding year two synergies, CVS identified opportunities for over $750 million in savings simply by combining existing assets and capabilities. The majority of these will come from reduced corporate expenses and operational integration between the two companies. On integration, CVS plans to introduce initiatives that increase adherence to prescription regimens and close gaps in care, offering programs at sites of care to reduce unnecessary emergency room visits and moving more expensive therapies like infusion to lower-cost sites of care.
Longer-term, CVS believes its merger with Aetna will present truly unique innovations in its mission to offer greater access, simplicity, and value for patients. The retailer plans to improve management of five common chronic conditions – diabetes, cardiovascular disease, hypertension, asthma, and behavioral health – mixing its store assets, rich clinical data and pharmacy/medical claims to offer compelling care solutions. CVS also wants to enrich the breadth of services offered by MinuteClinic, linking care programs with its greater focus on chronic care, and join Aetna’s clinical programs with CVS’s real estate presence to decrease avoidable hospital readmissions.
At the heart of CVS’s strategy with Aetna is its existing assets – with a broad range of channels for care, from CVS’s digital platforms to its more community-focused pharmacies, the retailer is prepared to experiment with Aetna to help customers receive better and more affordable outcomes. Next year, the retailer will introduce its first concept stores that will pilot many of the services CVS plans to offer in conjunction with Aetna.
With the Department of Justice having approved the merger on October 10, CVS is confident that it will complete the final state-level approval processes by Thanksgiving and begin implementing its integration plans in 2019.
Pharmacy remains dominant growth driver, as CVS pursues its ambitions as a healthcare provider
In the Retail/LTC segment, revenues increased 6.4% to $20.9 billion, driven mainly by an increase in same-store prescription volume of 9.2%. Boosted by continued adoption of CVS’s Patient Care Programs, alliances with PBMs and health plans, and its inclusion in additional Medicare Part D networks, this continued script growth affirms the status of the pharmacy as CVS’s primary engine for overall growth.
Despite a slight bump in front-store sales of 0.8% - driven by sustained strength in the health and beauty categories - the front store remains a challenge for the retailer. CVS senior management’s decision to mention the front store only three times during the earnings call gave little certainty as to the retailer’s long-term plans for a historically important but underperforming section of its retail operations.
With Aetna integration ever closer, CVS looks to introduce “transformational change” to its store network
In the Q&A session following the call, CEO Larry Merlo laid out plans for how CVS plans to use existing store assets to build an integrated care network. Speaking of a “hub and spoke concept”, Merlo envisions the upcoming concept stores as healthcare hubs, with existing stores acting as referral points for these specialized care centers. The CEO also touched upon the role of the digital channel in this health hub system, mentioning the important role it will play in reaching customers’ doorsteps to channel ease and convenience.
In her follow-up comment, newly-promoted CFO Eva Boratto stated that CVS’s planned CapEx of roughly $2.5 to $2.8 billion would shift from remodels to investing in these concept stores and their surrounding network, highlighting new strategic focuses for the retailer following the merger with Aetna.
While the union with Aetna is not yet completed, and the arrival of the concept stores are at least a few months away, suppliers should begin considering how their products can fit into the health hub network. That means participating in the retailer’s upcoming chronic condition programs, seeking opportunities to collaborate with MinuteClinic, and helping to boost CVS’s credibility as a provider of healthcare through better health solutions.
For more information, please contact:
Ben Antenore, Analyst