By Brent Kendall and Anna Wilde Mathews
CVS Health Corp. will defend its acquisition of insurer Aetna
Inc. in two high-profile settings Tuesday, seeking to sell
skeptical investors and a federal judge on the nearly $70 billion
deal.
CVS lawyers will be in a Washington, D.C., federal court for the
start of an unusual three-day proceeding in which U.S. District
Judge Richard Leon is considering whether the Justice Department
adequately protected competition when it approved the deal last
year.
In New York, the Woonsocket, R.I.-based health-care company will
hold an investor day to discuss its outlook, with analysts looking
for evidence that CVS can improve its financial performance amid
challenges to its core businesses.
The deal, reached in November, combined CVS's sprawling network
of pharmacies and pharmacy-benefit-management business with Aetna's
health-plan assets. Coming together, the companies had sketched a
vision of lowered health-care costs and improved care for
consumers.
A CVS spokesman declined to comment on the investor day or the
court hearing.
The Justice Department's antitrust division approved the merger
after the companies agreed to sell off Aetna's Medicare Part D drug
business to WellCare Health Plans Inc. The department said the
divestiture was needed because Aetna and CVS had been important
competitors in selling Medicare drug plans to seniors in 22
states.
Groups like the American Medical Association said the
divestiture didn't do enough to protect competition for
prescription-drug plans, and they argued the department didn't
address broader concerns about health-care industry
consolidation.
The criticism caught the attention of Judge Leon, who is
considering whether to approve the settlement between the companies
and the Justice Department. Judges typically give the nod to such
settlements as a matter of routine -- and without extended
consideration -- but Judge Leon made clear he has concerns about
the deal, and he took the unprecedented move of scheduling three
days of hearings with live witness testimony.
The judge insists that the proceedings aren't a mini-trial of a
merger that the government isn't seeking to block, saying the
testimony would help him determine whether the settlement is in the
public interest.
Judge Leon, a George W. Bush appointee, said he would hear from
six witnesses: three critical of the merger and three selected by
CVS to testify in favor of the deal, including executives from CVS
and Aetna.
For its part, the Justice Department said in a May 24 filing
that Judge Leon's rules for the proceedings were unfair because the
company could neither present its own witnesses nor cross-examine
those critical of the settlement. Judge Leon said his procedures
were appropriate, rejecting what he described as the department's
"11th-hour request" to change them.
It isn't clear what would happen next should the judge reject
the Justice Department settlement allowing the merger. Meantime,
CVS is moving forward as if the court proceedings won't impact its
business. The company already has sold the assets to WellCare that
the Justice Department required, and it has contractual obligations
to provide support to WellCare through 2019, regardless of whether
the court formally approves the agreement.
CVS faces challenges that have affected its rivals as well,
including a squeeze on pharmacy margins and government scrutiny of
the traditional pharmacy-benefits business model, particularly
rebates paid by drugmakers. Health insurers' shares have also been
dragged down by some Democrats' support for universal government
health coverage. There were "pressures on all the legacy businesses
that accelerated heading into this year," said Matthew Borsch, an
analyst with BMO Capital Markets.
In February, CVS gave a downbeat earnings projection for 2019,
pushing its shares down sharply and leading investors to press for
more detail about the company's growth plans. The shares have
remained stagnant, despite stronger-than-expected first-quarter
results, and CVS has promised a fuller picture of its future in the
Tuesday session.
A JPMorgan Chase & Co. poll of investors found their highest
priorities for the CVS investor day were long-term financial
guidance and a clear strategic vision. Among respondents who didn't
own CVS shares, a third said the session might convince them to
buy. "Their credibility can be restored based on their ability to
lay out the strategy and numbers," said Lisa Gill, a JPMorgan
analyst.
Analysts polled by Refinitiv were projecting earnings per share
of $5.02 in 2019, $5.66 in 2020 and $6.67 in 2021. On an adjusted
basis, they predicted earnings per share of $6.85 for 2019, a 5.4%
increase to $7.22 for next year and growth of 8% to $7.80 for
2021.
"It's really about operating earnings and their ability to grow
that," said Kevin Caliendo, an analyst with UBS.
Investors are also looking for specifics around CVS's plans to
build up its health-care role in the wake of the merger, say
analysts, including through new health hub stores designed to offer
a broader range of services, many aimed at those with chronic
illnesses. Problem areas such as the company's troubled Omnicare
long-term-care pharmacy business are also likely to draw questions,
they said.
--Aisha Al-Muslim contributed to this article.
Write to Brent Kendall at brent.kendall@wsj.com and Anna Wilde
Mathews at anna.mathews@wsj.com
(END) Dow Jones Newswires
June 02, 2019 07:14 ET (11:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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