CVS surpasses expectations for second quarter

WOONSOCKET, R.I. — CVS Health easily beat analysts’ projections for second quarter sales and earnings, and raised its full-year profit outlook.

The company posted adjusted earnings per share of $2.40, topping Wall Street’s average forecast of $2.17.  Net income was $2.96 billion, or $2.23 per share, up from $2.79 billion, or $2.10 per share, a year earlier.

Revenue in the period ended June 30 climbed 11% to $80.64 billion, exceeding the expected $76.37 billion.

The company now projects adjusted earnings per share for the year of between $8.40 and $8.60. It had earlier predicted $8.20 to $8.40.

“Despite a challenging economic environment, our differentiated business model helped drive strong results this quarter, with significant revenue growth across all of our business segments,” said president and CEO Karen Lynch. “The continued success of our foundational businesses accelerated our strategy to expand access to health services and help consumers navigate to the best site of care. We remain a trusted community health destination for millions of individuals with health products and services that engage customers in all aspects of their health wherever and whenever they need it.”

Operating income increased 5.6% primarily due to a $225 million pre-tax gain on the sale of PayFlex Holdings Inc., which was consummated on June 1,  and a decrease in amortization of intangible assets compared to prior year, partially offset by a slight decrease in adjusted operating income.

Adjusted operating income decreased $77 million, primarily driven by declines in the Retail/LTC and Corporate/ Other segments, largely offset by increases in the Health Care Benefits and Pharmacy Services segments.

Interest expense decreased $53 million, or 8.3%, due to lower debt.

The effective income tax rate increased to 26.5% compared to 25.3% in the prior year primarily due to basis differences on the sale of PayFlex.

In the Retail/LTC segment, revenue increased 6.3% to $26.3 billion, primarily driven by increased prescription and front store volume, including the sale of COVID-19 over-the-counter test kits and the impact of an extended cough, cold and flu season, as well as pharmacy brand inflation. These increases were partially offset by decreased COVID-19 vaccinations and diagnostic testing, the impact of recent generic introductions and continued pharmacy reimbursement pressure.

Adjusted operating income decreased 9.1%,  primarily driven by continued pharmacy reimbursement pressure, decreased COVID-19 vaccinations, increased investments in the segment’s operations and capabilities and the absence of a $125 million gain from an anti-trust legal settlement recorded in the year-ago quarter. These decreases were partially offset by the increased prescription and front store volume described above, improved generic drug purchasing and the favorable impact of business initiatives.

Prescriptions filled increased 1.6% on a 30-day equivalent basis,  primarily driven by increased utilization and the impact of an extended cough, cold and flu season, partially offset by decreased COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 4.6% on a 30-day equivalent basis.

In the Pharmacy Services segment, total revenues increased 11.7% to $42.8 billion, primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements.

Adjusted operating income increased 5.7%, primarily driven by improved purchasing economics, including increased contributions from the products and services of the company’s group purchasing organization. These increases were partially offset by continued client price improvements, decreased contributions from pharmacy and/or other administrative services for 340B covered entities and increased restructuring and business integration costs.

Total pharmacy claims processed increased 3.9% on a 30-day equivalent basis . The increase was primarily driven by net new business, increased utilization and the impact of an extended cough, cold and flu season compared to the prior year, partially offset by decreased COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 5.7%.

In the Health Care Benefits segment, total revenues increased 10.9% to $22.8 billion, driven by growth across all product lines.

Adjusted operating income increased 13.4%, primarily driven by strong underlying performance, including higher favorable development of prior-periods’ health care cost estimates, and membership growth across all product lines. These increases were partially offset by incremental investments to support growth in the business and net realized capital losses.

The MBR decreased to 82.9% compared to 84.1% in the prior year reflective of strong underlying performance, including higher favorable development of prior-periods’ health care cost estimates.

Medical membership as of June 30 was 24.4 million, up 922,000 members from a year earlier, reflecting increases across all product lines. The medical membership was down 90,000 from March 31, primarily due to the decrease of approximately 266,000 members in connection with the divestiture of the company’s international health care business in Thailand during the second quarter of 2022. Excluding the impact of this divestiture, membership increased across all product lines compared with March 31.

The segment experienced favorable development of prior-periods’ health care cost estimates in its Government Services and Commercial businesses, primarily attributable to first quarter 2022 performance.

Prior years’ health care costs payable estimates developed favorably by $666 million during the first half of the year. This development is reported on a basis consistent with the prior years’ development reported in the health care costs payable table in the company’s annual audited financial statements and does not directly correspond to an increase in 2022 operating results.

CVS raised its full-year 2022 GAAP diluted EPS guidance range to $7.23 to $7.43 from $6.93 to $7.13 . The company also raised its full-year 2022 cash flow from operations guidance range to $12.5 billion to $13.5 billion from $12.0 billion to $13.0 billion.

The adjustments between full-year 2022 GAAP diluted EPS and adjusted EPS include amortization of intangible assets, the gain on the divestiture of PayFlex, a legal settlement, a loss on assets held for sale, the corresponding income tax benefit or expense related to the items excluded from adjusted income and the impact of certain discrete tax items concluded in the first quarter.