CVS posts loss in 2018, predicts dire year as 2015 deal turns into lemon

CVS HEALTH reported a loss of $596 million in 2018. / BLOOMBERG NEWS FILE PHOTO/CHRISTOPHER LEE
CVS HEALTH reported a loss of $596 million in 2018. / BLOOMBERG NEWS FILE PHOTO/CHRISTOPHER LEE

NEW YORK – CVS Health Corp. shares dropped in early trading Wednesday after the health care company said its results would be dragged down by rising costs and poor results from a 2015 takeover, all while trying to integrate its $70 billion purchase of insurer Aetna last year.

Adjusted earnings this year will be $6.68 to $6.88 a share, CVS said, compared with the $7.36 average of Wall Street estimates. The shares fell 7.8 percent.

“2019 will be a year of transition as we integrate Aetna and focus on key pillars of our growth strategy,” CVS CEO Larry J. Merlo said in a statement announcing the Woonsocket-based company’s financial results. “We are fully aware of the need to address the impact of certain headwinds that are having a disproportionate impact in 2019.”

The drugstore and pharmacy benefits company’s future now depends on how its deal for health insurer Aetna turns out. CVS has said it will use the takeover, which closed in November, to create a vertically integrated health care company that can better coordinate care and offer more services to customers.

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But it may also come under more scrutiny from investors. The 2019 guidance was a “major disappointment,” said Evercore ISI analyst Ross Muken. It “will stoke fears the Aetna deal was defensive in nature.”

The company reported a loss of $596 million in 2018, compared with a $6.6 billion profit in 2017. Loss per diluted share for the year was 57 cents, compared with a gain of $6.45 per share in 2017. Revenue for the year was $194.6 billion, a 5.3 percent year-over-year increase.

Many challenges

The headwinds Merlo cited as hurting CVS’s outlook are coming from multiple directions.

The company announced a $2.2 billion fourth quarter write down on its 2015 takeover of Omnicare, a $12.9 billion deal that was meant to build the company’s business serving patients in nursing homes and long-term medical-care facilities. The most recent write down followed a second-quarter write down of $3.9 billion.

The business hasn’t grown as expected. There are fewer patients in long-term care facilities, which caused a number of CVS’s customers to go bankrupt last year. The sector “has continued to experience industry-wide challenges that have impacted our ability to grow the business at the rate that was originally estimated when the company acquired Omnicare,” CVS said.

Together, the write downs add up to half of what the company paid for Omnicare three years ago. The unit is predicting more challenges in the future, CVS said.

CVS also didn’t get as much of a benefit as it expected from the 2017 corporate tax law changes. While the corporate rate dropped from 35 percent to 21 percent, the company said it had to give back some of those gains in the form of higher wages and benefits for workers.

With the Aetna deal closure, CVS now has three main lines of business: retail drugstores and long-term care, health care benefits, and pharmacy services. Despite the disappointing outlook for 2019, there were some bright spots in those businesses.

CVS’s pharmacies filled more prescriptions in the fourth quarter than a year prior, and front-of-store retail sales rose – defying pressures from online sellers that have hurt the drugstore sector as a whole. Revenue and prescriptions in the pharmacy-benefits management segment rose as well.

The company’s Retail/LTC segment reported revenue of $84 billion, a 5.8 percent increase year over year. Prescriptions filled increased 8.8 percent to 1.3 billion in 2018, while the segment’s operating profit declined from $6.5 billion on 2018 to $620 million in 2018.

The Pharmacy Services segment of the company reported a revenue of $134.1 billion in 2018, a 2.7 percent increase year over year. Operating income remained relatively stable at $4.7 billion.

The company’s Health Care Benefits segment, the equivalent of the former Aetna Health  Care segment, reported revenue of $5.5 billion and operating income of $276 million. Medical membership at the end of the year was 22.1 million.

Robert Langreth is a reporter for Bloomberg News. PBN contributed to this article.