CVS Health Q4: building resilience with integrated healthcare model

Stewart Samuel
Program Director - Canada
@RetailAnalysis

Date : 13 February 2020

We review CVS Health’s fourth quarter performance and how it’s developing an integrated healthcare model, building resilience against online pharmacy operators.

Fourth quarter key numbers

  • Total Q4 revenue increased 22.9% to $66.9bn, driven by the acquisition of Aetna
  • For the full year, total revenue increased 32.0% to $256.8bn
  • Within the Retail/Long Term Care (LTC) segment, revenue increased 2.5% to $22.6bn
  • Same-store sales increased 3.2%, driven by a 4.1% increased in pharmacy same-store sales and a 0.7% increase in front-store same-store sales
  • Prescription volumes increased 6.9%
  • Adjusted operating income increased by 1.3% to $3.8bn
  • The retailer expects revenues within retail to increase by 1.0-2.5% in 2020, with growth in health and beauty expected to drive incremental operating income in the segment

Source: CVS Health

Strategic priorities

The retailer has delivered a solid set of results in 2019, leading it to update its outlook for the year ahead. The acquisition of Aetna has been transformational for the organisation, enabling it to develop a fully-integrated healthcare model. Its focus is on making healthcare simpler and enabling consumers to make more informed decisions. The performance, along with the ongoing integration of Aetna, provides it with a firm foundation to drive its four-pillar strategy:

  • Grow and differentiate its businesses, including opening 600 to 650 HealthHUB locations by the end of 2020, with a further 800-900 conversions planned for 2021
  • Deliver transformational products and services, including new oncology and chronic kidney disease care programmes
  • Create a consumer-centric technology infrastructure, including growing its CarePass membership and delivery program, with over 1.6m members currently enrolled
  • Modernise enterprise functions and capabilities, including roll-out of additional intelligent automation and the robotic automation of routine processes

Evolving its retail model

The expansion of the HealthHUB format will significantly change the CVS Health retail model. Along with its MinuteClinics, practitioners can treat around 80% of what a primary care physician can treat. This enables patients to avoid more costly or unnecessary care. The converted 50 stores to date continue to outperform, delivering higher prescription volume, more MinuteClinic visits and increased utilisation of health-related services.

Building resilience against online competitors

Front-store sales are in line with expectations, where the retailer is shifting the focus to place a stronger emphasis on health and beauty items. Learnings from the HealthHUB stores in terms of the front-end product mix are also being applied across the wider estate. The sale of higher margin products and services, increased traffic, and the ability to deliver medical cost savings underpins the value of its physical network. This provides a degree of resilience against online pharmacy operators and emerging sector entrants.

Leadership changes

To support its growth and innovation plan, the retailer has made several changes to its leadership team:

  • Alan Lotvin has been appointed as executive vice president at CVS Health. He previously led the company’s transformation programmes
  • Jonathan Mayhew has been appointed executive vice president, transformation, and will be responsible for the transformation product portfolio
  • Alec Cunningham has been appointed executive vice president and chief operating officer for the Aetna business
  • Derica Rice, executive vice president and president, CVS Caremark, will depart CVS Health. Derica will remain with the company through February to ensure a seamless transition

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