CVS Health Posts Strong Retail, Omnicare Outlook

CEO Larry Merlo is upbeat about the growth potential for walk-in clinics and as a consequence of its acquisition of OmniCare last summer, sees "opportunities across the spectrum in skilled nursing, assisted living, and the independent living spaces."

A relatively mild cold and flu season dampened fourth quarter profits for CVS Health's Minute Clinics walk-in clinics business, which otherwise showed solid growth throughout 2015, CVS Health CEO Larry Merlo told analysts Tuesday.

"We continued to grow the number of clinics," Merlo said in a conference call to discuss fourth quarter results. "Minute Clinic is the largest walk-in clinic operator in the country. In the fourth quarter we opened 36 new clinics in addition to the 79 acquired clinics in Target, ending the year with 1,135 clinics in 33 states plus the District of Columbia."

Excluding the Target clinics acquired in last summer's $1.9 billion deal, Merlo says Minute Clinic revenues increased 4.4% in the quarter, "below the usual trend due to the mild cold and flu season versus a year ago. However, we achieved our full year 2015 revenue target of about $345 million."

Although he is upbeat about the growth potential for walk-in clinics, Merlo walked back earlier projections that CVS Health would operate 1,500 clinics by 2017. "Obviously we are going to be focusing on the Target integration, which includes about 80 clinics this year," he said.

"We may be a year or two behind that original target of 2017. We continue to be comfortable with the rollout. As we sit here today, about 50% of the U.S. population actually lives within 10 miles of a Minute Clinic."

Pharmacy Conversions
On other fronts, CVS Pharmacies last week opened its first retail stores inside Target stores in North Carolina. CVS Health will convert 1,672 Target pharmacies over the next eight months.

Merlo says the Woonsocket, RI-based company is "in the process" of ramping up its Target pharmacies and that the financial and operational returns on investment will not be fully felt until later this year.

"We have a lot of heavy lifting to do, when you think about the store and systems conversions, we've got about 1,700 or those," he says. "We are not in roll-out mode. It will take the better part of the next six seven months to complete those activities. That is when you will see the marketing efforts ramp up. The benefits that we will see from beginning to create customer conversion within the Target stores and the Target guests will be more of a second-half impact."

Merlo says CVS Health's $12.9 billion acquisition of OmniCare last summer should also start to bear fruit by the second half of 2016.

"We have a number of pilots that have just begun to kick off that focus on the revenue synergies side of the equation, acknowledging that we see opportunities across the spectrum in skilled nursing, assisted living and the independent living spaces," Merlo says. "Those opportunities will manifest themselves across our retail business. It's early in the process. The benefits that we will see from that we don't expect to begin to come on line until the second half of the year."

Merlo says CVS Health is poised to take advantage of its recently completed roll out of the Epic electronic health records system in its retail settings.

"That does a couple things for us. It provides an infrastructure that broadens our scope of practices," he says. "You are beginning to see that now as we are getting into the treatment of some conditions. That does create a tighter interface with the health system affiliations, where we can transmit the information around a particular patient in a seamless fashion. We are beginning to get some traction in terms of triaging patients across the delivery of care."

CVS Health reported a net revenues increase of 11% to $41.1 billion in the fourth quarter of 2015, ending a record year for net revenues that increased by 10%, or $153.3 billion in 2015. Operating profits were up 17.6% in the fourth quarter of 2015 to $2.7 billion, and rose 7.4% to $9.5 billion throughout 2015.

CVS Health ended 2015 with 9,600 retail pharmacies, a net expansion of 130 new stores.