CVS swings to $6.6B profit in 2019, buoyed by Aetna Acquisition

Despite rising pharmaceutical prices there are economic pressures for mergers between industries in the healthcare sector.  This one is between retail outlets, and health insurance (plan).

• CVS Health slightly topped Wall Street expectations for the fourth quarter of 2019 on both earnings and revenue, which clocked in at $66.9 billion, up almost 23% year over year.
• The Aetna integration, along with higher volume in both the pharmacy benefit management business Caremark and the retail segment, drove revenue growth in the quarter and in 2019 overall. For the year, its first as a combined company, CVS saw total revenue of $256.8 billion, up 32% from 2018.
• The Woonsocket, Rhode Island-based health giant reported a profit of $1.7 billion in the quarter, up from a loss of $421 million in the prior-year period. CVS raked in a profit of $6.6 billion for the full year, up from a loss in 2018 of $596 million, it said in results announced premarket Wednesday.

Dive Insight:

The ubiquitous drugstore giant, which overcame an unprecedented judicial hold-up of its acquisition with payer Aetna in September, reported its highest year-over-year earnings growth in the first three quarters of last year due to the results of the Aetna buy.

While the fourth quarter didn't include the impact of share dilution and interest expense from the transaction, CVS still saw earnings growth higher than financial analysts and its own internal expectations, according to top leadership.

Continued price compression in pharmacy services, retail reimbursement pressure and an increased generic dispensing rate all slightly tamped down revenue, both for the quarter and the full year. However, CVS benefited from a lower tax rate than anticipated.

The company reported operating income of $3 billion in the fourth quarter and $12 billion for the full year, up 269% and 198%, respectively. Adjusted operating income, which factors out the impact of the acquisition, of $3.8 billion in the quarter and $15.3 billion for the year, was up 1.3% and 36.2%, respectively.

Caremark and CVS' retail segment both saw their revenue tick up slightly in the fourth quarter to $37 billion and $22.6 billion, respectively. For the PBM, claims processed increased more than 10% to 534 million, mostly due to new business and retention of a large portion of a contract with Centene, extended through 2022.

For the 2021 selling season, Caremark has completed for 65% of contract renewals to date, including the extension of the Blue Cross Blue Shield's federal employee program contract through 2021 and renewal of Wellcare's contract through 2023.​

Aetna spurred revenue in CVS' healthcare benefits business to almost triple in the quarter to $17.2 billion. Revenue in the segment was $69.6 billion for 2019, up 677% from 2018, pre-Aetna. CVS had almost 23 million beneficiaries in its Aetna and Medicare Part D plans in 2019, up 3.6% year over year, and a medical loss ratio of 85.7%.

The payer saw growth in government services. Its Medicare Advantage business grew over three times the industry average in 2019, CEO Larry Merlo said Wednesday, and Medicaid growth was oiled both organically and through M&A, including the December acquisition of Illinicare from Centene.

Along with the results, CVS also announced a leadership shuffle. EVP Alan Lotvin, who previously helmed CVS' transformation efforts, is replacing Derica Rice as president of Caremark and Jonathan Mayhew, ex-SVP for Aetna markets, will replace Lotvin in managing the transformation product portfolio.

As a result of the earnings, CVS bumped up its guidance for 2020, expecting operating income to ring in between $12.8 billion and $13 billion and diluted earnings per share of $5.47 to $5.60.

It remains to be seen whether this will be a patient-centered experience or a boon for stockholders. Perhaps it will be both and the efficiency of one organization integrating health insurance coverage and retail pharmacy will be interesting. The initial quarterly financial statement may be a figment of a profit and loss statement.  Let's give it a year or two to unwind.

CVS swings to $6.6B profit in 2019, buoyed by Aetna | Healthcare Dive: