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Next Results Announcement

11.05.19

CVS Health

Revenues

$63.4b

Adjusted EPS

$1.89

For the three months ended 06.30.19

Consolidated

Total revenues and adjusted revenues (1) increased 35.2% and 35.8%, respectively, for the three months ended June 30, 2019 compared to the prior year. Revenue growth was primarily driven by the acquisition of Aetna Inc. (“Aetna”), which the Company acquired on November 28, 2018 (the “Aetna Acquisition”), as well as increased volume and brand name drug price inflation in both the Pharmacy Services and Retail/LTC segments. The revenue increase was partially offset by continued reimbursement pressure in the Retail/LTC segment, price compression in the Pharmacy Services segment, and an increased generic dispensing rate.

Operating expenses and adjusted operating expenses (2) increased 65.2% and 59.1%, respectively, for the three months ended June 30, 2019 compared to the prior year. The increase in operating expenses is due to the impact of the Aetna Acquisition, an increase in intangible amortization related to the Aetna Acquisition and an increase in acquisition-related integration costs. The increase in adjusted operating expenses was primarily driven by the impact of the Aetna Acquisition.

Operating income and adjusted operating income increased 342.7% and 55.1%, respectively, for the three months ended June 30, 2019 compared to the prior year. The increase in both operating income and adjusted operating income was primarily due to the Aetna Acquisition as well as increased claims volume and improved purchasing economics in the Pharmacy Services segment. These increases were 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 due to the absence of the $3.9 billion pre-tax goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment recorded in the three months ended June 30, 2018, partially offset by higher intangible asset amortization related to the Aetna Acquisition.

Net income increased 175.3% for the three months ended June 30, 2019 compared to the prior year primarily due to higher operating income described above, partially offset by (i) higher interest expense primarily due to financing activity associated with the Aetna Acquisition and the assumption of Aetna’s debt as of the Aetna Acquisition date and (ii) higher income tax expense associated with the increase in pre-tax income.

The effective income tax rate was 25.5% for the three months ended June 30, 2019 compared to (24.1)% for the three months ended June 30, 2018. The difference in the effective income tax rate compared to the prior year was primarily due to the $3.9 billion goodwill impairment charge recognized in the three months ended June 30, 2018, which was not deductible for income tax purposes.

(1) The Company defines adjusted revenues as total revenues (GAAP measure) excluding the impact of certain items that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance such as interest income on financings associated with proposed acquisitions (for periods prior to the acquisition) and any other items specifically identified herein. See “Non-GAAP Financial Information” earlier in this press release for additional information regarding the items excluded from total revenues.

(2) The Company defines adjusted operating expenses as operating expenses (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance such as acquisition-related transaction and integration costs, store rationalization charges, goodwill impairments, gains/losses on divestitures, and any other items specifically identified herein. See “Non-GAAP Financial Information” earlier in this press release for additional information regarding the items excluded from operating expenses.

Pharmacy Services Segment

Total revenues increased 4.2% for the three months ended June 30, 2019 compared to the prior year 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 4.0% on a 30-day equivalent basis for the three months ended June 30, 2019 compared to the prior year, primarily driven by net new business and the continued adoption of Maintenance Choice® offerings.

Operating income and adjusted operating income increased 9.6% and 9.7%, respectively, for the three months ended June 30, 2019 compared to the prior year primarily driven by increased claims volume and improved purchasing economics, partially offset by continued price compression. The increase in operating income was also partially offset by increased intangible amortization related to Aetna’s mail order and specialty pharmacy operations.

Retail/LTC Segment

Total revenues increased 3.7% for the three months ended June 30, 2019 compared to the prior year. The increase was primarily driven by increased prescription volume and brand name drug price inflation, partially offset by continued reimbursement pressure and the impact of generic drug introductions.

Front store revenues represent approximately 22.7% of total Retail/LTC segment revenues. Front store revenues increased in the three months ended June 30, 2019 compared to the prior year primarily driven by increases in health product sales, which benefited from an extended cough and cold season and the impact of the shift of sales associated with the Easter holiday from the first quarter of 2018 to the second quarter of 2019.

Total prescription volume grew 5.9%, on a 30-day equivalent basis, for the three months ended June 30, 2019 compared to the prior year. 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.

Operating income increased 169.7% and adjusted operating income decreased 8.3%, respectively, for the three months ended June 30, 2019. The increase in operating income was primarily due to the absence of the $3.9 billion pre-tax goodwill impairment charge related to the LTC reporting unit recorded in the three months ended June 30, 2018. Operating income and adjusted operating income were both negatively impacted by (i) continued reimbursement pressure, (ii) increased operating expenses primarily driven by the investment of a portion of the savings from tax reform in wages and benefits and (iii) declining year-over-year performance in the Company's long-term care business.

Health Care Benefits Segment

Total revenues increased $16.6 billion for the three months ended June 30, 2019 compared to the prior year primarily driven by the Aetna Acquisition.

Operating income and adjusted operating income increased $1.1 billion and $1.4 billion, respectively, for the three months ended June 30, 2019 compared to the prior year 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. Operating income and adjusted operating income for the three and six months ended June 30, 2018 reflect the seasonality of earnings for the Company’s SilverScript PDP business. The quarterly earnings of the Company’s SilverScript PDP business generally increase as the year progresses.

Medical membership as of June 30, 2019 of 22.8 million remained consistent compared with March 31, 2019, reflecting increases in Medicare and Medicaid products, offset by declines in Commercial products.

The Health Care Benefits segment experienced favorable development of prior-periods’ health care cost estimates in its Commercial, Medicare and Medicaid products, primarily attributable to first quarter 2019 performance and provider recoveries.

Prior years’ health care costs payable estimates developed favorably by $489 million during the six months ended June 30, 2019. 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 2019 operating results.

Guidance

The Company confirmed its full year 2019 consolidated GAAP operating income guidance range of $11.8 billion to $12.0 billion and raised the guidance range for full year adjusted operating income to $15.2 billion to $15.4 billion from $15.0 billion to $15.2 billion. The Company also raised and narrowed the GAAP diluted EPS from continuing operations guidance range to $4.93 to $5.04 from $4.90 to $5.05, and raised and narrowed the Adjusted EPS guidance range to $6.89 to $7.00 from $6.75 to $6.90.

The Company also provided guidance for the third quarter of 2019. GAAP diluted EPS from continuing operations is projected to be in the range of $1.16 to $1.20, and Adjusted EPS is projected to be in the range of $1.75 to $1.79.

The adjustments between GAAP operating income and GAAP diluted EPS from continuing operations and adjusted operating income and Adjusted EPS include adding back amortization of intangible assets, integration costs related to the Aetna Acquisition, a store rationalization charge and expected gains/losses on divestitures.