[ad_1]
CVS Chief Executive Larry Merlo in Washington last month. He said Tuesday that the company expects to realize over $750 million in synergies by the second year after the acquisition of Aetna closes.
Photo:
Andrew Harrer/Bloomberg News
CVS Health
shareholders are still waiting for answers to the most important question surrounding the business: How will its acquisition of a health-insurance giant turn out?
Even so, there are enough reasons for investors to be optimistic about the company’s future.
CVS said Tuesday in its third-quarter earnings release that it expects its nearly $70 billion acquisition of
Aetna
to close before Thanksgiving. That is good news, because investors have been supportive of the proposed deal. And Chief Executive Larry Merlo said on the conference call that CVS now expects to realize more than $750 million in deal synergies by the second year after closing, an improvement on previous guidance.
There are still plenty of unknowns. CVS said it won’t give detailed financial guidance for 2019 until February. And this deal, which is the first of its kind, will involve integrating an insurer, pharmacy-benefits manager and retail pharmacy chain. It is possible that CVS could revolutionize health care and earn huge returns for its investors, or that the transaction could fall flat after CVS loads up on debt to finance it.
Expectations are low enough for investors to be patient, however. Wall Street analysts expect adjusted earnings per share of $7.41 in 2019, just 5% above the midpoint of this year’s guidance.
And there is a clear logic to how combining an insurer into CVS could boost profit: Steering patients to lower-cost care centers, such as CVS Minute Clinics, could reduce hospital utilization and lower insurance costs.
Meanwhile, standing pat would also entail significant risk, given the threat of new entrants such as
Amazon.com
into the pharmacy business. Third-quarter results for CVS were solid, but not spectacular. Sales of $47.3 billion and adjusted earnings of $1.73 a share both topped analyst estimates. But CVS still projects this year’s operating profit will be essentially flat. The stock rose Tuesday morning and is up slightly this year, but down more than 30% from its 2015 peak.
That is more than enough reason to try a grand experiment.
Source link
