CVS Says Slowing Prescriptions Will Hurt Profits Next Year

  • Shares lose 12%, biggest one-day drop since November 2009
  • CEO says Tricare, Prime Therapeutics networks exclude CVS

CVS Health Corp.’s earnings forecasts for 2016 and 2017 came in below analysts’ estimates as the company said its drugstores will lose millions of prescriptions, sending the shares plunging Tuesday to their biggest daily loss in seven years.

CVS expects to lose more than 40 million retail prescriptions annually as the military’s Tricare health insurance program and Prime Therapeutics, which manages drug benefits for many states’ Blue Cross and Blue Shield plans, will exclude CVS from pharmacy networks, Chief Executive Officer Larry Merlo said on a quarterly conference call. The shares skidded 12 percent, the most since November 2009, to $73.53 at 4 p.m. in New York.

CVS is both a drugstore operator and pharmacy-benefit manager, negotiating prices with drugmakers for health insurers and companies that pay for drug coverage. Rivals such as Express Scripts Holding Co. and Walgreens Boots Alliance Inc. are cutting into CVS’s retail pharmacy dominance by taking away some of the company’s best business.

“While this earnings season has taught us in health care that gloom and doom is around every quarter, this was a shocking outcome for CVS despite materially lowered expectations,” Ross Muken, an analyst with Evercore ISI who rates the shares buy, said in a note to clients.

Express Scripts said Sept. 30 that starting in December, CVS pharmacies would be removed from the retail pharmacy network for Tricare, the military health insurance program. Prime Therapeutics said Aug. 29 that a new alliance with Walgreens Boots made the CVS rival the core participant in Prime’s national preferred pharmacy network, beginning Jan. 1, 2017.

Margin Compression

The changes will take CVS’s retail pharmacies “entirely out of those networks,” Merlo said on the conference call. CVS learned of them very recently, he said.

“We became aware of the network changes after the fact and were not given the opportunity to respond,” he said.

CVS has also seen continued compression of its profit margins, Merlo said on the call. The company is also “currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business,” he said in the statement.

Adjusted earnings for 2017 will be $5.77 to $5.93 a share, CVS said Tuesday in a statement, compared with analysts’ estimates of $6.53. In addition, the company announced a “multi-year” plan to buy back an additional $15 billion of its own stock.

Prime Therapeutics said it made the agreement with Walgreens “as one way to stem the tide of rising drug prices.” Prime still maintains an open pharmacy network, including CVS and other pharmacies, for clients that want that option, it said in a statement.

Bulking Up

CVS’s third quarter earnings, excluding some items, were $1.64 a share, the Woonsocket, Rhode Island-based company said, compared with the $1.57 average of analysts’ estimates compiled by Bloomberg. The beat was partly from lower-than-expected taxes in the third-quarter.

CVS has been bulking up in the past year, buying nursing-home pharmacy Omnicare Inc. at an announced enterprise value of $12.9 billion, and spending $1.9 billion to buy the pharmacy locations inside Target Corp. stores. Rivals are also getting bigger -- Walgreens agreed last year to purchase Rite Aid Corp., in a move that would enlarge one of CVS’s top competitors in the retail pharmacy market.

Revenue at the drugstore and pharmacy benefits management company grew 15 percent to $44.6 billion, helped by the acquisitions. Analysts had expected $45.3 billion.

Other details from the third-quarter results:

  • Net income attributable to CVS rose 24 percent to $1.54 billion, or $1.43 a share, from $1.25 billion, or $1.11 a share, a year earlier.
  • Pharmacy same-store sales increased 3.4 percent.
  • Pharmacy front-of-store-retail sales declined 1 percent as fewer customers came to the stores.
  • The company lowered its full-year 2016 adjusted earnings forecast to $5.77 to $5.83 a share, down from the $5.81 to $5.89 projection the company gave in August. Analysts had predicted $5.85 a share.
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