What's behind the loss of CVS Health in the fourth quarter? – The crazy fool



When CVS Health (NYSE: CVS) announced its results for the third quarter in early November, the big story was not really about the results. Investors have instead focused on the imminent acquisition of Aetna by the pharmacy giant. The acquisition was finalized only a few weeks later.

CVS Health announced its fourth quarter results before the market opens on Wednesday. The integration of Aetna into the company's financial performance for the quarter was certainly important. However, CVS Health's Omnicare Long Term Care Pharmacy (LTC) sector also shared the spotlight this time – and for good reason. Highlights of CVS Health's fourth quarter report are highlighted below.

CVS pharmacist at the counter in front of a customer

Source of image: CVS Health.

CVS Health results: raw numbers

Metric Q4 2018 Q4 2017 Change from one year to the next
Sales $ 54.4 billion $ 48.4 billion 12.4%
Net income from continuing operations ($ 421 million) $ 3.3 billion N / A
Adjusted earnings per share $ 2.14 $ 1.92 11.5%

Data Source: CVS Health. N / A = not applicable.

What happened with CVS Health this quarter?

CVS Health recorded a sharp increase in revenues compared to the same period last year. Most of the growth comes from the inclusion of Aetna's revenues, which totaled $ 5.5 billion for the period from November 28, 2018 to December 31, 2018.

The company's retail pharmacy business also performed well, with revenue increasing year-over-year by 5.4% due to higher prescription volumes and higher brand-name prices. Prescription volume has increased largely due to continued adoption of the Company's patient care programs, collaborations with Drug Benefits Officers (PBMs) and CVS Health's preferred status in several Medicare Part D networks .

CVS Health's PBM business grew modestly in the fourth quarter. Revenues increased slightly by 2.2% over the prior year as the increase in the number of pharmacy claims was partially offset by continued price pressure from customers.

Despite all the good news, CVS Health still had a net loss of $ 421 million in the fourth quarter. Why? The Company recorded goodwill impairment of $ 2.2 billion in the fourth quarter (and $ 6.1 billion for the year) related to its long-term pharmacy unit in difficulty .

CVS Health noted that its Omnicare LTC business continues to face multiple challenges. These issues include lower occupancy rates in specialized nursing facilities (FNS), long-term care facility reimbursement pressures, and a significant deterioration in the financial health of DSF clients.

The company's non-GAAP earnings were, however, not affected by the impairment loss of the LTC acquisition. As a result, CVS Health again recorded strong growth in adjusted EPS over twelve months.

What management had to say

Larry Merlo, CEO, said: "2018 has been a pivotal year for CVS Health, we have successfully completed our transformational merger with Aetna, begun the effective implementation of our integration strategy and achieved significant milestones in the implementation of an integrated health care model that will bring substantial value to our diverse stakeholders – we have achieved strong financial performance and met our operational expectations. "

Merlo added:

With the acquisition of Aetna, we paved the way for CVS Health to excel in a changing market. We strongly believe in the long-term value that all our capabilities can offer. Our unique combination will result in higher growth than the market in the entire company. Continued focus on community-level products and services will generate significant value for consumers and payers, while improving our bottom line and the value we deliver to shareholders. In the end, our open platform model allows us to meet the needs of all payers with newly created products and services. We are more excited than ever about the opportunities ahead.

Looking forward to

CVS Health expects diluted EPS from continuing operations to be in line with GAAP for the full year 2019 to be between $ 4.88 and $ 5.08. The company expects adjusted EPS of between $ 6.68 and $ 6.88. Even the upper limit of this range is lower than the adjusted EPS reported by CVS for the full year 2018.

Merlo acknowledges that "2019 will be a transition year" for CVS Health. The company will work to integrate Aetna into its business. He has work to do to turn his Omnicare Long Term Care business around. And CVS Health continues to face powerful rivals in the retail pharmacy.

However, in her presentation at JP Morgan's health conference in January, Merlo said that the acquisition of Aetna would allow CVS Health to create "a new gateway for healthcare." health". Merlo said that over time, the acquisition would be very profitable for shareholders. However, achieving this vision will take more than a quarter or even a year.


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