CVS 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

10% revenue growth

“We delivered approximately 10% growth in consolidated revenues, 14% growth in PBM operating profit, 8% growth in retail operating profit and 13.5% growth in adjusted earnings per share on a comparable basis.”

Clients are focused on controlling specialty costs

“many of you have asked what our clients are focused on, and the number one priority centers on controlling their rapidly rising specialty costs. And we’re bringing them an array of differentiated solutions. ”

Script volumes up 5.3% including share gain

“Pharmacy same-store prescription unit volumes increased 5.3% on a 30 day equivalent basis and we continue to gain pharmacy share. Our retail pharmacy market-share was 21.1% in Q4 and that’s up about 55 basis points versus the same quarter a year ago.”

Front store comps 0.7% excluding tobacco

“Turning to the front store, we saw continued decrease in traffic. That was partially offset by an increase in the average customer basket. Our front store comps were down 7.2% and adjusting for the tobacco impact, front store comps would have been up 0.7%. The impact of the tobacco exit was about 800 basis points and that’s about 100 basis points less than we anticipated. So again four months into it, it’s still early but we’re very pleased with these results.’

CVS 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Pretty solid growth

“Our adjusted earnings per share increased from 9% to $1.15 per share, a penny above the high end of our guidance range. Both the PBM and retail segments exceeded our revenue expectations along with the retail business delivering expanded gross margin. Operating profit in the retail business grew 8.8% at the high end of our expectations while operating profit in the PBM grew 8.5% exceeding our expectations.”

PBM clients are focused on controlling specialty spend

“Our clients continue to be very focused this season on achieving better control of specialty spend and we continue to differentiate our specialty offerings to provide a high level of clinical support to patients while managing trend for our clients and driving continued share gains in the business.”

Modest positive benefit from health reform

” Regarding health reform, not much is new since our last update and we continue to see a modest positive benefit to our script transform reform and that’s largely from the expansion of Medicaid. ”

Front store traffic was down

” turning to the front store, we saw a continued decrease in traffic that was partially offset by an increase in the average customer ticket. Our front store comps were down 4.5% and adjusting for the tobacco compact costs would have been approximately 480 basis points higher.”

Plans are emphasizing consumer driven plans with narrower networks

“I think as far as plan design changes we’re obviously see more movement consumer driven health plans. Where the member there’s more financial responsibility particularly upfront. So we are seeing providers, a high interest of providers in fact most of 50% providing coverage of generics so that there isn’t a negative impact on adherence which we are very pleased to see. I think other things around plan design are I think you are going to see more interest in narrow networks as we are kind of, as we are returning to higher trend I think plans are going to be looking to at the lower cost and ways like that. And I think when you think of narrow networks you really got to just aggregate the different segments.”

Walgreen’s FY 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Walgreen FY 4Q14 Earnings Call Notes

Boots and Bergen

“We closed fiscal 2014 entering the next important phase in our strategic partnership with Alliance Boots amending an exercise and the option to complete the second step. Through the transaction, the new Walgreens Boots Alliance will have unmatched global reach strength and leadership and a broad mix of retail health, well-being and beauty businesses and an international pharmacy wholesale network all dedicated to ensuring people across the world lead healthier and happier lives.
This fiscal year, we also completed the transition of our drug distribution into AmerisourceBergen. Their company now supplies virtually all of our brand and generic medications; the strategic relationship together with Alliance Boots is establishing the leading global pharmaceutical wholesale and distribution network.”

Front end comps up on basket size, traffic down
“Turning to our front-end comp sales, which increased 1.3% in the fourth quarter, average basket size grew 3.5%, while traffic was down 2.2% as we cycled a more aggressive promotional environment from a year ago.

margins fell 100bps based on pressure in pharmacy.

‘Now on to margins, adjusted gross margin was 27.9% in the current quarter compared to 28.9% last year, 100 basis point decline. Margins were solid on the front end, but were weak in the pharmacy… The primary drivers for the pharmacy margin decrease were increased third party reimbursement pressure partly due to contract step downs increased Medicare Part D business mix including our strategy to continue driving 90-day prescriptions at retail, pronounced generic drug inflation on a subset of generic drugs and the mix of specialty drugs partially offsetting these pharmacy margin decreases were the positive effect of the increased rate of introductions of new generic this quarter versus the year ago quarter and purchasing synergies in the pharmacy.

Drug manufacturers can and will raise price in a tight market

“Let me say a few additional words about generic drug inflation. The dynamics under which generic drug and manufacturers can avail themselves of pricing actions has not changed. They are able to raise prices when demand outpaces supply. These drug supplies can be impacted by a number of mechanisms including regulatory actions by the FDA resulting the shutdowns of both API and finished dosage for manufacturing plants, generic drug manufacturer consolidation and portfolio harmonization, API manufacturer consolidation and FDA backlog on approvals as well as a shrinking pipeline of first to market generic blockbuster launches.
Our current environment is experiencing all of these mechanisms and as a result, the average inflation in our basket of generic drugs is mid-single digit as measured on a comparable drug priced basis.

Drug inflation is being caused by large increases in a small number of molecules

“This change is caused by very large price increases and a small percent of molecules because these supply constraints and other factors are continuing, we expect a generic drug inflation will be with us for a while.

headwinds through 2015

“The tailwinds we expect through fiscal 2015 will be largely offset in the short-term. Of note, our reimbursement rate pressure, including specifically lower Medicare Part B reimbursements coming in January of 2015 and the continued impact of generic drug inflation. Also affecting the EPS growth rate in 2015 is the timing of the close of step two with Alliance Boots.

Continued pressure on margins in 2015

“In 2015, we don’t expect to see that significant of a step-down. We think there will continue to be pressures plans we’re looking to control costs. And then certainly with generic inflation being a big driver of those contracts versus the deflation that we’ve seen over the past, we’re going to have to really understand and understand where generic inflation is going.

We may need legislative action to control this cost inflation

“I think it will probably end being both [better contracting and legislation]. I think certainly we do think that it’s going to persist based on our intelligence and all the industry intelligence that we’re seeing out there. It’s hard to predict. I think Jeff and his team have really ramped up their predictive modeling so we can understand what may happen going forward. But, I think that we may indeed see the benchmark, the tables begin to reflect what’s really going on with cost inflation, we’ll begin to see some of that as we speak and then a lot of the different things that Jeff and team are doing with regard to putting inflation protection into contracts. So I think we will begin to be able to get after.

Lots of dynamics leading to inflation

“Well, again, I think it’s a host of things that have driven that inflation. Certainly, there is consolidation in the buying space with us and three or four other large buyers buying about 80% to 90% of the generics. But at the same dynamic, there is some consolidation in suppliers. But that said, I wouldn’t say that all of it. There are a lot of other dynamics

Inflation is coming from a molecule-supply perspective, not a vendor perspective

“I would look at it as more a molecule-led than vendor-led. I mean, we continue to forge very deep relationships at the highest levels and on a global scale with the major generic manufacturers. But the inflation that we’re seeing is really not associated with any one particular vendor. It’s really based on the molecule opportunity where there is harmonization in the portfolios, or manufacturers have supply issues or pulling out of molecules where that price opportunity comes, somebody then takes an increase and the others feel some confidence to follow up, sometimes later than others.

Rite Aid FY 2Q15 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Medicaid expansion states driving growth

“Our total comparable store sales increased by 4.1% in the quarter driven by a 3.7% increase in comparable scripts. Higher utilization in Medicaid expansion states drove this increase as well as the result of our pharmacy initiatives.’

Guiding pharmacy GM lower along with profitability

“we expect pharmacy gross margin in the second half of fiscal ’15 to be lower than previous estimates based upon current estimates for reimbursement rates and anticipated lower profitability due to a delay in the introduction of a generic equivalent to Nexium and due to higher cost for generic drugs that recently lost their exclusivity. Therefore, we have lowered our guidance for adjusted EBITDA, net income and net income per diluted share.”

Reimbursement rate environment tougher than we thought

“I would say the reimbursement rate environment seems a little tougher in the back half than we expected. And I’m sure as you know John, the reimbursement rate view evolves all the time. You know both have plans and our negotiation and we have migrations inside the plans and a number of different things going on all the time related to reimbursement rates. So that’s a view we are constantly updating and looking at. And based on what we can see at this time, the back half looks a little tougher than we initially expected even as of June.”

Distribute 40b of drugs per year

“keep in mind that we dispense at the AWP level about $40 billion worth of drugs a year. So even a modest few basis points in reimbursement rate change in our view can have impact on earnings. ”

It’s a competitive marketplace

” I think it’s a competitive marketplace out there. I think there are some probably dynamics at work in the PBM marketplace as well as in federal and state governments that are also playing in to some of the activity that we see from a reimbursement rate perspective. Those are probably the broader trends I can point at.”

The reimbursement needs to go to patient value

“the value that we create through what we do today is not by having the absolute lowest cost on the pill that we purchase. I mean, honestly, average generic drug cost that we sell is maybe $25-$27, something like that. And, so how much money are we going to save on a $25 or $30 prescription. That’s not really the question at the end of the day. The question is, is the patient compliant? Are they getting the counseling the need? Did they understand what they need to do to improve their health and stay out of emergency rooms and doctors offices.

So, again, we are talking philosophically here. I do not have the specific answer, how this migration is going to occur. But I think over time, there is only so many dollars we are going to be able to squeeze out of the drug spends, particularly on the generic side. And so, it’s really going to come down to then what differentiates you in the marketplace. If not, then you can fill that script for $24 versus $25. It’s what did you do to help a patient. So at some point, I think the model migrates to something more where maybe there is a reimbursement for the service that you are providing to the patient versus trying to make gross margin on the script. Is that going to happen tomorrow, it’s not. But I think if we look over the longer-term, that’s really probably the model that our industry needs to begin the migration to over some period of time.”

Mckesson deal is a big deal

“The thing with McKesson was really a timing issue in terms of just getting the thing implemented. And it’s important to understand that it was a massive transition for our company. I mean we put in a huge amount of effort and so did McKesson to get this thing done in the timeframe that we did. Really, I believe strategically we are headed in the right direction here. I mean I think our combined purchasing power is going to help us get the lowest cost over time. ”

maybe some green shoots of growth from exchange insureds?

“On a much, much, much smaller basis there is a, starting to be a developing trend there. As we talked about before there are some plans, Mark, where they are fairly specific to exchange based healthcare. It doesn’t cover all the exchanges but there is a few that are pretty focused on the exchanges and even those are starting — they are not material yet in total number but those are actually growing pretty rapidly right now too. “

CVS 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Raising and narrowing guidance range

“given our strong performance year-to-date, we are raising and narrowing our adjusted earnings per share guidance for the year to a range of $4.43 to $4.51 and that’s up from our previous range of $4.36 to $4.50”

Unclear how many exchange insurance buyers are newly insured

“The mix of individuals who were newly insured as opposed to those who previously had coverage, it still remains unclear with various sources quoting anywhere from a low of 27% of individuals newly insured up to a high of 85% with multiple data points suggesting it might be somewhere in between.”

Newly covered is a positive secular trend for the next several years

“we can be confident that several million Americans have gained coverage in recent months and this should provide a positive secular trend in pharmacy volume growth for the next several years.

Set up Red Oak Sourcing with Cardinal Health

“Now let me update you on our 10-year agreement with Cardinal Health that’s built upon our combined sourcing expertise. As you’re aware, last month we completed the formation of Red Oak Sourcing, the largest generic sourcing entity here in the U.S. and located in Foxborough, Massachusetts. And at that time, the employees and functional responsibilities were transitioned from CVS Caremark and Cardinal to Red Oak Sourcing.”

Clients concerned about managing specialty spend

“top of mind for clients this selling season is achieving better control of their specialty spend. Among our clients, specialty represents about 22.5% of total drug spend under the pharmacy benefit and projections have this continuing to grow at a mid-teens rate.”

“all specialty spend including that paid under the medical benefit will likely to grow to as much as 50% of total drug spend by 2018.”

“n addition to benefits from new business and the addition of Coram, another driver of specialty revenue growth was Sovaldi, the new hep C drug.”

Thoughts on Sovaldi

“There are estimated to be roughly 3 million people in the U.S. requiring treatment and as everyone knows, the potential costs of treatment is very high. As you might imagine, the growing costs in this category are of significant concern to our clients and we have a number of programs in place to ensure appropriate utilization and cost management. And as competing products become available late this year and next, we will look for opportunities to introduce formulary management to further drive down costs.”

Increased spending coming from medicaid expansion

“I think we’re seeing utilization pretty flat I think from the exchanges I think as had previously talked, I think we’re seeing more of a benefit coming out of the Medicaid expansion. I think there’s still some uncertainty as we mentioned in our prepared remarks in terms of when you look at the exchange population, just how many of those are incremental to health insurance coverage.”

Not seeing much change in the consumer, still cautious

“I don’t think we’re seeing any changes in the consumer. I think that the consumer continues to be a cautious purchaser of products. At the same time, I don’t think we’ve seen a change in the competitive environment. We still see an awful lot of promotion across competitors.”

M&A is part of our DNA

“M&A has been part of our DNA for a long time in our company. We’ve been very clear that as we think about capital deployment, one area to deploy capital is in kind of investing backward in organically in our business and we will continue to do that. I would say that at the same time, we’re going to be to your point very disciplined in how we approach the market. If you look at our asset base today, we don’t have any glaring gaps or holes in capabilities at this point in time. But as we said, to a degree that we can bolt-on assets that make sense that we have line of sight to both synergies and returns, we’ll do that.”

Walgreen 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Pharmacy market share 19%, filled 218m prescriptions

“Our retail pharmacy market share increased to 19% from the quarter, up 20 basis points year-over-year and we filled 218 million prescriptions, up 4.5% from the same period last year.”

Seen reimbursement pressure and generic drug price inflation

“we’ve seen an increase in reimbursement pressure as well as a shift from historical patterns of deflation in generic drug cost to inflation. Over the past year, we’ve seen cost increases on a subset of generic drugs and in some cases these increases have been significant. Both reimbursement pressure and generic inflation are having an adverse effect on margin.”

Working on contracting strategy to decrease costs

“To address the pressure on our gross margin, we’re focused on our contracting strategy to account for increasing drug cost.”

Our organization is the largest purchaser of drugs worldwide

“Along with Alliance Boots and AmerisourceBergen, our three companies are the largest purchaser of pharmaceuticals worldwide. ”

Front end traffic down slightly but basket size up

“The components of the 2.2% front-end comp traffic which decreased by 0.7% and basket size which increased by 2.9%. We are pleased with the trends in the one and two year stack comps over the past few quarters.”

Still room to improve margin in front end

“we think we actually have tremendous opportunity to grow EBIT and operating margin on the front end of the business. We are beginning to getting more confidence in just that, and I think that is obviously going to help us with the overall business.”

Evaluating everything to look for opportunities to operate more efficiently

“we’re going after the business from a structural point of view, everything from supply chain, everything from how we supervise and manage stores, everything from looking at our store footprint as we never have in the past and as we indicated on the last call. So we’re really taking a step back and looking at the entire enterprise from a structural perspective.”

We’re not going to be tolerant of partners who try to be opportunistic in pushing price

“we’re not going to be very tolerant of long-term partnership with people that are opportunistic.”

I wouldn’t say it’s all around drug inflation

“I wouldn’t say it’s all around the drug inflation. I mean we’ve certainly had some increase in our third party reimbursement pressures. We have had fewer brand-to-generic drug conversions compared to a year ago. And so as we think about our contracting strategy it certainly will account for these increases in the drug cost.”

Looking to manage cost of fill through automation, centralization

“we’re aggressively looking at our cost of fill around improving efficiencies in our cost of fill sometimes like technology where our customers are refilling their prescriptions through digital and mobile technology, through automation that is making us more efficient in selling prescriptions, through centralization that is reducing labor in the stores but as the same time increasing our customer service level.’

Inversion isn’t so simple, we’re doing all the work we need to do to make the right decision

“I’ll say as we had said that we’re looking at all and everything. We’re looking at everything from what the timing, best timing would be, what the capital structure should be, what our tax structure or what the structure could do to as far as our effective tax rate. So, and that’s complex stuff I guess is what I would say Ricky as we work through this. We are working around the clock to try to understand all the above so that we’re able to make the right decision for the company. And again that’s why we need a little more time to be able to bring all this together. But I would say that we’re looking at everything. It is complex and it’s all interdependent”

Didn’t really anticipate this generic price inflation

“I think in the order of magnitude I think probably generic inflation is specifically more — probably more important because it was — we didn’t quite anticipate it…This was really kind of snuck up I think on the industry and us”

Still pretty early days for ACA

“David, it’s still very early to tail around ACA. I mean obviously publicly they have announced 8 million people have joined the ACA. We certainly feel like we’re getting our share of that 8 million people, but certainly some of those folks were former cash paying customers that are now in the exchange.”

it’s a subset of molecules that are inflationary, the contracts aren’t structured to handle that

“I think it’s a subset of molecules that have kind of popped up in this inflationary environment that we’re — that caught I think the entire industry a little off guar. I’d say ourselves as well. We’re now all over with the combined Walgreen team with Bern team focused on those molecules. I do think that and there is a lot of moving parts there as Wade alluded to earlier, that the cost increase, the — the corresponding AWP is not keeping up with the cost increases.”

Strong pound favorable for alliance boots ownership

“we have a strong pound situation, which is also very favorable too, so I think on that we feel very good about their business”

Rite Aid 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

EBITDA decline from lower drug reimbursements

“Adjusted EBITDA for the quarter was $282.6 million as compared to $344.8 million during the prior-year period. This result was driven by a reduction in pharmacy gross profit due to lower reimbursement rates that were not offset with reductions in generic drug costs”

Mckesson distribution agreement will deliver working capital benefits

“As announced in February, we are transitioning to a new drug sourcing and distribution process through our expanded partnership with McKesson. This new process is expected to deliver long-term drug cost savings and will provide our pharmacies with direct to store delivery five days a week, which will provide significant working capital benefits.”

New purchasing model creates short term hit to GM

“As we transition to our new purchasing model, we expect lower pharmacy gross margin during the transition period, because we are unable to negotiate lower drug cost as we normally would do to offset reimbursement rate pressure and generic drug cost increases”

There are indications that ACA is having an impact

“In terms of our script count, there’re indications that the Affordable Care Act is beginning to have a positive impact as we’re experiencing growth in states that have expanded Medicaid. In addition, we’re seeing high utilization among our patients”

Remodeled stores outperforming

“We now have completed 1,325 Wellness remodels, which represents 29% of all Rite Aid locations. These stores continue to outperform the rest of the chain in terms of same-store front-end sales and script count’

Reasons for reimbursement rate pressures:

“In terms of reimbursement rate pressures, I guess there’s a few things. We’re always dealing with a competitive reimbursement rate environment. Things that can develop differently than our plans would include just a mix of business amongst and within plans, so migration to narrow networks and business moving between different types of plans can have an impact on reimbursement rates. We also still have certain contracts that are not in a kind of guaranteed rate. We call those MAC contracts. So those can be a little bit more volatile.”

A delicate transition to having McKesson manage costs

“during the transition period of moving from managing the cost ourselves to having McKesson manage our cost, there is just a period of vulnerability that occurs here where we don’t have as much leverage in the marketplace.”

The incremental exchange plan customer isn’t driving high utilization

“n terms of exchange-based plans, probably 70% of the people that we can identify related to an exchange-based plan came from another plan where we already had them as customers. So the net incremental piece of that was much smaller. And those people, those net incremental patients haven’t been huge utilizer as yet. So the utilization as a percentage of those plans is probably less than the average.”

Medicaid expansion is a different story

“A little bit of a different story in the Medicaid. In the Medicaid expansion states, we’ve seen strong script growth, as Frank mentioned in his comments, particularly when you compare them to the non-Medicaid expansion states, where there isn’t much growth. So it’s clearly had an impact.”

One of the reimbursement pressures is plan mix

“Another situation would be we might have a contract with a PBM where we’re in different plans. One is a very narrow plan. One is a medium plan and one is the broad plan. And we might see as we come through into the fiscal year gradually as there’s utilization that the PBM has migrated patients from the broad plan, which has the highest reimbursement rate, to either the middle plan or the lowest reimbursement rate plan. And we call that a change in plan mix”

Narrow network plans a growing thing

“I do think the narrow network thing continues to build a little bit. And I think we see it not only in our managed care plans, but also probably in Medicare Part D plans as well.”

The narrow network is one of the reasons we did the Mckesson deal in the first place

“And it’s right back to one of the important strategic reasons why we need to be very competitive on our drug cost, which is why we started down the road on this McKesson relationship to begin with. The combined purchasing power, we think, over the long term will make us a competitive provider of solid drug prescription delivery over the long term, which is really kind of where we’re going with the McKesson relationship.”