Will Pharmacy Services Drive CVS Health's (CVS) Q1 Earnings?

CVS Health Corporation CVS is scheduled to report first-quarter 2019 results on May 1, before the opening bell. In the last reported quarter, the company delivered a positive surprise of 3.38%, the average trailing four-quarter beat being 4%.

Let’s take a look at how things are shaping up prior to this announcement.

Factors at Play

Within Pharmacy Services, despite a tough pricing competition, CVS Health is has been gaining on high level of service and execution, competitive pricing and a unique integrated model. This, in turn, might have a bearing on first-quarter results.

The company is also upbeat about sustaining a solid year-over-year revenue trend during the first quarter of 2019, thereby reaping benefits from the Pharmacy Services segment. Such a performance can be attributed to higher specialty pharmacy and pharmacy network claim volumes as well as brand inflation.

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However, with regard to its 2019 PBM selling season, CVS Health anticipates modest net benefits from this selling season. The first quarter may suffer an Anthem related headwind, given the investments required to onboard the business during its accelerated timeline.

This apart, the company apprehends this segment's current-year figures to be affected by two important changes, which will be reported in the upcoming earnings releases. First, the company’s Individual SilverScript PDP will move from the PBM segment to its newly-formed Health Care Benefits (HCB) segment. Second, the company will integrate the pharmacy operations of Aetna into its PBM. We expect these factors to influence the company’s yet-to-be-reported quarter’s top-line result.

Taking all these shifts into consideration, overall, within the PBM segment, the company projects revenues in the range of $136.5-$139 billion during 2019.

For the first quarter, the Zacks Consensus Estimate for the Pharmacy Services segment revenues is pegged at $32.87 billion, indicating a nominal improvement from $32.2 billion reported a year ago.

Turning to the HCB segment, the company expects to see strength in the government programs, driven by industry-leading Medicare growth and the key Medicaid wins in Kansas and Florida. This may strengthen the top line in the first quarter.

However, this segment may take a hit from the fact that certain one-time benefits realized by Aetna in 2018 are not likely to recur in 2019. This, in turn, might affect the segment in the first quarter.

Within the Retail/Long-Term Care Segment, CVS Health is likely to progress on consistently strong adjusted script growth owing to the steady success of the pharmacy clinical care program that improved patient retention. Additionally, CVS Health expects to experience an uptick in the recently-formed Medicare partnerships and the new regional preferred alliances forged in the ongoing year.

All these should contribute to the company’s top-line performance within this segment in the first quarter. However, the company is worried about the challenges in its Long-Term Care business. Per CVS Health, the reimbursement woe will linger. This apart, the rising generic dispensing rate and the latest generic drug introductions have been hurting the business.