CVS CVS Health Corporation

By Anna Wilde Mathews and Aisha Al-Muslim 

CVS Health Corp. offered a downbeat earnings projection for 2019, its first year as a merged health-care company, saying results would be dragged down by challenges in areas including its pharmacy-benefits and long-term-care businesses.

The Woonsocket, R.I.-based company, which in November completed its nearly $70 billion acquisition of insurer Aetna Inc., said that it was taking rapid steps to address the problems, including a cost-cutting effort, and that its ambitious deal positioned it for long-term growth.

CVS, which has said that its deal to bring together drugstores, pharmacy-benefit management and insurance would help it cut health-care costs and improve care, said it was building new offerings.

For 2019, the company said it was projecting adjusted earnings per share of $6.68 to $6.88, compared with analysts' estimates of $7.41 a share, as polled by Refinitiv. CVS said its results are being hurt by factors including smaller benefits from the rollout of new generic drugs and the performance of Omnicare, its long-term-care pharmacy business.

In its pharmacy-benefits business, CVS said it was experiencing a squeeze related to rebates that it receives from drugmakers and passes on to clients. It has guaranteed clients that it will provide them certain rebate payments, but it is seeing slower growth than it had expected in the prices of branded drugs. CVS said it also will lose the PBM business of Centene Corp., beginning in 2019.

"Many of these headwinds are transitory in nature," CVS Chief Executive Larry Merlo said in a call with analysts. He said that the rebate-guarantee impact would peak in 2019 and ease at the end of 2020, and that Omnicare's results were expected to stabilize and improve.

CVS's efforts to bolster its retail offerings, the rollout of a new PBM contracting model and moves to build its Medicare Advantage coverage business, among other efforts, will help improve results, the company said.

CVS also said savings from its Aetna deal are expected to exceed its previous goal of $750 million in 2020, and should be between $300 million and $350 million in 2019.

Mr. Merlo said in an interview that 2019 is a transitional year, and "the work is well under way in terms of the integration of Aetna," with various pilots being rolled out. He said CVS hopes to improve pharmacy margins partly by forging contracts that reward it for taking on a broader role, with services such as helping patients adhere to their prescriptions and filling gaps in their care.

CVS swung to a loss for the fourth quarter of 2018, though it beat analysts' estimates on an adjusted basis. The company reported a fourth-quarter net loss of $421 million, or 37 cents a share, down from a profit of $3.29 billion, or $3.22 a share, a year earlier.

The net results were affected by a $2.2 billion charge related to the struggling long-term-care business. Adjusted earnings were $2.14 a share, beating the $2.05 a share analysts polled by Refinitiv were projecting.

The stock was down 7.9% in afternoon trading Wednesday. Shares are down 8.9% in the past year.

Mr. Merlo also said in the call that CVS had concerns about the impact of a new federal proposal that would curb rebates from drugmakers tied to plans offered under Medicare and Medicaid. He suggested that the proposal, which could change before it is finalized and isn't expected to take effect in 2019, might push up premiums in Medicare's drug-benefit program and damp enrollment by seniors. He said the proposal could result in a "profit windfall" for the makers of branded drugs. Mr. Merlo also suggested that employers and other commercial PBM clients weren't likely to quickly adopt a model similar to the federal proposal.

Earlier this month, CVS unveiled pilots of a new store format it called HealthHUB, which focuses more on health and wellness than its traditional stores by offering health-care services, new products and services and space for the company and community groups to offer health-related events.

For the fourth quarter, CVS's revenue rose 12.5% to $54.42 billion, slightly missing the consensus forecast of $54.58 billion from analysts polled by Refinitiv. Revenue growth was driven by increased pharmacy network claims, increased prescription volume and the addition of Aetna, the company said. Same-store sales grew 5.7%, ahead of the FactSet estimate of a 4.6% increase.

After the close of its Aetna deal, CVS created a new health-care-benefits segment equivalent to the former Aetna health-care segment, which includes insured and self-insured medical, pharmacy, dental and behavioral health products and services. From Nov. 28 to Dec. 31, the health-care-benefits segment had revenue of $5.55 billion. Its medical membership as of Dec. 31 was 22.1 million, reflecting decreases in commercial insurance and Medicaid products.

Write to Anna Wilde Mathews at anna.mathews@wsj.com and Aisha Al-Muslim at aisha.al-muslim@wsj.com

(END) Dow Jones Newswires

February 20, 2019 13:52 ET (18:52 GMT)

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