Trouble at CVS Health long-term care business weighs heavily

Trouble at CVS Health long-term care business weighs heavily Photo: AP

February 20, 2019 11:51 AM

CVS Health is setting 2019 earnings expectations well below Wall Street forecasts, as the company struggles to fix part of its business while blending in a major acquisition and attempting to change how customers use its stores.

The drugstore chain and pharmacy benefit manager also is dealing with industry-wide pressure to reduce what customers pay for prescriptions. CVS Health shares sank while broader indexes stayed largely flat Wednesday after the company unveiled its 2019 forecast and detailed fourth-quarter results.

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CVS Health booked a $2.2 billion charge in the final quarter of 2018 from a business that provides services to long-term care facilities. That's in addition to a $3.9 billion charge notched in last year's second quarter.

That adds up to more than half of the $10 billion price CVS Health paid in a 2015 deal to buy pharmacy distributor Omnicare and expand into dispensing prescription drugs to assisted living and skilled nursing homes. CVS CEO Larry Merlo said then that he saw the deal as a "substantial growth opportunity," given the aging U.S. population.

But the company said Wednesday that it has been dealing with challenges like low occupancy rates in skilled nursing locations and the bankruptcy of a significant customer. Merlo told analysts the company still sees growth opportunities in parts of that business, and he expects the performance to improve.

CVS Health Corp., based in Woonsocket, Rhode Island, also runs more than 9,900 retail locations as the nation's second-largest drugstore chain and processes over a billion prescriptions annually as a pharmacy benefit manager.

The company expects adjusted earnings per share to range between $6.68 and $6.88 this year. That compares to the average analyst expectation of $7.35 per share, according to FactSet.

Merlo told analysts the company sees 2019 as a "bridge to the future," and they expect their business to strengthen meaningfully as they integrate the operations of Aetna, a health insurer that covers more than 22 million people.

CVS Health spent about $69 billion to buy Aetna in a deal it completed last year. A federal judge is still reviewing the transaction.

The company wants to use this deal to help remake many of its drugstores into regular sources of health care for customers, especially those who need help dealing with chronic conditions. Company leaders envision turning stores into one-stop shops where patients can get their vision tested, their blood sugar monitored and also see a nurse practitioner and fill a prescription.

Analysts have applauded this shift, especially since competitors like the online retail giant Amazon are hurting store sales. But no one knows yet how profitable these new services will be, Edward Jones analyst John Boylan said.

"We really like where the long-term strategy is," he said. "But it's not easy, and these things do take time."

In the fourth quarter, CVS Health booked a $419 million loss due to the latest long-term care charge.

Earnings adjusted for one-time items totaled $2.14 per share, as revenue jumped more than 12 percent to $54.42 billion.

Analysts expected earnings of $2.09 per share and $54.61 billion in revenue, according to FactSet.

Company shares slid 7 percent, or $5.03, to $64.85 in afternoon trading. The shares of competitors Walgreens Boots Alliance Inc. and Cigna Corp. also were down.

CVS Health's stock price also dropped nearly 10 percent last year and is still far below the closing price of $75.53 it registered Oct. 25, 2017, the day before The Wall Street Journal first reported on the possibility of an Aetna deal.

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This story has been corrected to show that the company posted a net loss of $419 million in the fourth quarter, not $421,000.

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Credits

By TOM MURPHY

(Copyright 2019 by The Associated Press. All Rights Reserved.)

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