CVS shares tumble 8% as forecast takes a hit from investments in Aetna

Pedestrians walk by a CVS store on November in San Francisco, California.

Justin Sullivan | Getty Images
Pedestrians walk by a CVS store on November in San Francisco, California.

CVS Health disappointed investors on Wednesday with a lower-than-expected earnings forecast amid its integration of health insurer Aetna and uncertainty over rebates weighing on its pharmacy benefit management business.

CVS closed its $70 billion acquisition of Aetna in November. CVS has touted the transaction as a way to transform how Americans receive health care and lower their costs, as well as strengthen CVS’ business.

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However, the forecast CVS gave on Wednesday for the year implies there may be more challenges — and costs — in making the combination work. It also highlights the pressures weighing on CVS’ core businesses.

Shares of CVS fell 8 percent Wednesday, their worst day since Nov. 8, 2016, when shares fell nearly 12 percent.

Here’s what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $2.14, adjusted, vs. $2.05 expected
  • Revenue: $54.42 billion vs. $54.58 billion expected

“2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy,” CVS CEO Larry Merlo said in a statement.

For the full year of 2019, CVS forecasts adjusted earnings of $6.68 to $6.88 per share, below the $7.41 per share analysts polled by Refinitiv had expected. The company expects revenue in the range of $249.86 billion and $254.29 billion, according to slides from CVS’ conference call with analysts. The Street had expected $247.61 billion for the year.

CVS plans to spend $325 million to $350 million on incremental investment spending, which essentially wipes out the net savings of $300 million to $350 million that CVS anticipates from the Aetna acquisition, Evercore analysts Ross Muken and Mike Newshel wrote in a note to clients Wednesday.

“This will stoke fears the [Aetna] deal was defensive in nature and that base CVS will continue to reset lower,” they wrote.

CVS anticipates integration costs to total $550 million this year, CFO Eva Boratto said on a call with analysts.

CVS said it expects adjusted operating income for its retail and long-term care business to drop about 10 percent this year to a range of $6.59 billion to $6.71 billion. It said about half of the decline will come from investments CVS made after the federal tax overhaul and challenges in its long-term care business. Reimbursement pressures will also weigh on the results, the company said.

Adjusted operating income of CVS’ pharmacy services unit, or its Caremark pharmacy benefit management business, is expected to decline in the low-single digit percents to a range of $4.83 billion to $4.92 billion for the year, CVS said. It cited lower brand inflation — drugmakers not hiking prices of prescription drugs as they normally do — as a factor affecting its outlook.

CVS also named “ongoing questions around rebates” as a challenge in 2019.

President Donald Trump and top administration health officials have vowed to change how pharmacy benefit managers operate. Currently, PBMs negotiate discounts, called rebates, with drug companies. The Trump administration wants Congress to ban these “backdoor deals,” a move that could hurt CVS and other PBMs.

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“We fully support the administration’s objectives to lower drug prices and out-of-pocket costs for consumers,” Merlo said on a call with analysts Wednesday. “Unfortunately, we see the rebate rule taking us backward, not forward.”

In the fourth quarter, CVS reported a net loss of $421 million, or 37 cents per share, down from a profit of $3.29 billion, or $3.22 per share, a year earlier. This included a $2.22 billion goodwill impairment charge (a loss of $1.99 per share) related to CVS’ long-term care business.

One of CVS’ major clients, Senior Care Centers, filed for bankruptcy in December, weighing on CVS’ fourth-quarter results and posing an ongoing challenge for 2019.

On an adjusted basis, CVS earned $2.14 per share, above the $2.05 per share expected by analysts surveyed by Refinitiv.

Net sales rose 12 percent to $54.42 billion, shy of the $54.58 billion analysts had anticipated.

Same-store sales increased 5.7 percent from the year-ago quarter, when they grew just 0.1 percent. Pharmacy drove the overall gain, with same-store sales up 7.4 percent against weak sales growth a year ago. Front-store sales, which include items like toilet paper and shampoo, grew 0.5 percent.

Last week, CVS unveiled its HealthHUBs, or concept stores that contain fewer traditional drugstore items like greeting cards and more health services like blood draws and health screenings.

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