Company forecasts return to profit growth, with hopes of cost cuts from Aetna tie-up
By Sharon Terlep
CVS Health Corp., under pressure to reassure skeptical investors after its merger with Aetna Inc., said it would return to profit growth next year and detailed a vision for a health-care behemoth that drives down medical costs.
After warning earlier this year that 2019 profits would decline, CVS gave longer-term projections for the first time since the Aetna merger. The company said Tuesday it expects adjusted earnings per share of at least $7 in 2020, growing by a mid-single-digit percentage in 2021 and larger increases the years following.
Wall Street analysts had predicted adjusted earnings per share of $7.22 for next year and growth of 8% to $7.80 for 2021, according to a poll by Refinitiv. The adjusted earnings exclude factors unrelated to CVS operations, including costs and income related to asset sales and acquisitions.
"The breadth and depth of consumer data we have access to is unmatched," CVS Chief Executive Larry Merlo said on Tuesday, kicking off a meeting with investors and financial analysts to review the company's forecasts and strategy. "We are going to be the driving force for change in our health-care system."
Also Tuesday, the company's lawyers were in a federal court in an unusual proceeding to defend their $70 billion merger, which closed in November.
CVS shares, which have tumbled this year, rose 2.3% Tuesday to $54.62.
CVS is under pressure to find new ways to counter slowing revenue from prescription drugs, which drive the bulk of the pharmacy chain's sales. The company and its rivals also face 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.
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 stagnated despite stronger-than-expected first-quarter results, and CVS had promised a fuller picture of its future in the Tuesday session.
On Tuesday, finance chief Eva Boratto predicted challenges in the company's pharmacy-benefits business due to pricing pressures and a decrease in new business. She said CVS expects better performance from its health-insurance and pharmacy units, where both revenue and adjusted operating income are projected to increase.
CVS said by the end of 2021 it plans to have 1,500 new health hub stores designed to offer a broader range of services, many aimed at those with chronic illnesses. The company, with about 9,800 stores, previously said it aimed to convert roughly 1,000 locations into hubs and hadn't given a timeline.
A trio of health hubs in Houston has proved successful, Kevin Hourican, president of CVS Pharmacy, said in an interview. He declined to say whether the new model improved store profitability but said the stores posted increased traffic and higher demand for prescriptions and medical services, and on average sold higher-margin items.
Rival Walgreens Boots Alliance Inc. is also adding similar services to hundreds of U.S. drugstores. Ultimately CVS hopes its health-hub model will lower costs for chronic-disease sufferers, which will save the company money through Aetna while creating a service other insurers will pay for.
CVS plans to fund the health-hub expansion by cutting back on traditional store refurbishments, Mr. Hourican said. It plans this year to open additional hubs in Houston, the Philadelphia area, Atlanta and Tampa, Fla.
"This is about a long-term strategic plan with no sugar cubes being offered up to fast-money traders," said Renny Ponvert, CEO of research firm Management CV Inc. "The risk is the fact that it's never been done before."
The company said it still expects the merger with Aetna to create about $300 million to $350 million of cost savings and other benefits in 2019 and about $800 million of so-called synergies in 2020.
For 2019, the company kept the targets it set in February, when it predicted adjusted earnings of $6.75 to $6.90 per share and consolidated revenue of $251.2 billion to $254.4 billion.
--Anna Wilde Mathews contributed to this article.
Write to Sharon Terlep at email@example.com