Yesterday CVS provided its initial 2018 guidance, which came as a surprise as the management team had previously announced that its guidance would be provided along 4Q17 earnings call. We believe this move is to reassure the investment community on its business growing in line with their expectations (ex-acquisition). Clarity on growth is driving a relief rally in the stock this morning.
Highlights of the guidance are:
• Net revenue growth of 0.75%-2.5% (in-line with expectations)
o Retail/LTC: 2.5%-4% growth. Strong 6-7% scripts growth thanks to broader partnership with PBMs and health plans and expansion of preferred pharmacy network for Medicare Part D (this had a negative impact earlier as CVS was excluded from some networks). SSS of +2-3.5%. We are relieved to see positive trends in same store sales for 2018
o PBM: +1.5-2.5%, driven by strong claims growth of 8%, but offset partly by rebates administration for Aetna Medicare Part D, generic specialty introduction, slower brand inflation and pricing pressure. PBM growth is lower than in the past although claims growth is still very good
• Operating profit growth of 1%-4% (in-line with expectations), helped from scripts/claims growth, purchasing efficiencies from the Red Oak venture and streamlining initiatives. Negative impact from implementation of Anthem service agreement and divestitures of a business unit (-125bps impact on margin), which we view as one-time impact items
o Retail/LTC: low-single digit growth
o PBM: low-to-mid-single digits growth due to strong 8% growth in claims
• Higher interest expenses driven by new debt to fund the Aetna deal
• Lower tax rate due to tax reform (27% vs. 39%, which will drive an incremental $1.2B cash flow). The management team will use this additional cash to fund growth initiatives (which we assumed they would do, rather than return the cash to investors)
• Aetna deal still expected to close in 2H18 but not included in growth/profit guidance