CVS Eases Concerns About Aetna Deal --Update

By Sharon Terlep and Anna Wilde Mathews

CVS Health Corp. delivered stronger-than-expected results in its first quarter as a combined health-care company, taking a step toward selling skeptical investors on its acquisition of insurer Aetna Inc.

The Woonsocket, R.I.-based company, which completed the nearly $70 billion takeover in November, said the insurance business performed well while the company saw stronger profits on brand-name drugs and increased sales at its drugstores.

The results mark a shift from February when the company offered a downbeat earnings projection for 2019 that sent shares tumbling. The performance also distinguishes CVS from rival Walgreens Boots Alliance Inc., which reported weaker profits in the most recent quarter and lowered its forecast citing smaller profits from generic drug sales.

The company is under pressure from investors, who are pushing for a clearer picture of its growth prospects. Investors' focus will now shift to the company's planned investor day set for June 4, when it has promised to give a more detailed look at its plans.

The Aetna acquisition created an industry giant that combines a retail pharmacy, pharmacy-benefit manager and Aetna's insurance businesses.

CVS shares had lost a third of their value since it completed the Aetna deal, erasing roughly $34 billion of market value. Shares were up about 5% in afternoon trading.

"None of us are happy with where our stock price is," CVS Chief Executive Larry Merlo said in an interview. "From our perspective we're very early. We're creating a pathway that no one has gone on in an effort to make health care more local and make it more simple."

"Considering that expectations have been low, we see this as the first positive catalyst that restores investor confidence in this Management team and drive multiple expansion," SVB Leerink analyst Ana Gupte said.

One sign of investors' discontent came at a lunch meeting that Mr. Merlo and finance chief Eva Boratto held with investors in early March. The meeting was tense, according to an investor who attended, with the audience pressing the company for a clearer picture of its financial projections for future years. In a note describing the March meeting that came out soon after it occurred, UBS analyst Kevin Caliendo wrote that there appeared to be a "growing credibility issue with investors on how the company is framing the organic path forward for the retail, and consternation that synergy realization isn't flowing enough to the bottom line to generate accretion from the deal."

The first-quarter CVS results and call with analysts "will help investor sentiment," Mr. Caliendo said Wednesday. "The next big hurdle is going to be visibility on 2020 earnings and earnings growth."

Analysts said that many of the challenges facing CVS are tied to the nature of its core businesses and the policy landscape, and similar issues have hit its competitors.

The health-insurance sector has also recently seen shares slump even among companies with strong earnings results, due to investor worries about policy matters including some Democrats' interest in universal government-provided health insurance.

CVS has said its deal to bring together drugstores, a pharmacy-benefit manager and an insurer would help it cut health-care costs and improve care. Mr. Merlo has talked about how the merged company will help smooth the fragmented health-care experience for consumers.

CVS is also remaking some of its stores into new health hubs, offering a broader range of services, many aimed at people with chronic health conditions such as diabetes. The company has said it hopes to save money and bolster care by improving patients' adherence to their prescriptions and pushing care to lower-cost sites, reducing use of emergency rooms.

"Our first full quarter of combined operations was a success in many ways," Mr. Merlo said in a statement.

On Wednesday, the company reported a first-quarter net income of $1.4 billion, or $1.09 cents a share, up from a profit of $998 million, or 98 cents a share, a year earlier.

The company, which realigned its reporting segments to reflect the combined company, said Aetna contributed $16.6 billion in revenue to its health-benefits segment that was bolstered by strong sales of Medicare products.

CVS reported stronger retail sales from its drugstore chain, which it attributed to success in selling more health-focused offerings, and an increase in pharmacy claims. Prescription volume grew 5.5% from the same period a year ago.

Same-store sales increased 3.8%, beating the FactSet estimate of a 1.2% increase. The retail business will continue to be challenged by lower margins on prescription drugs that will last throughout the year, Mr. Merlo said.

CVS raised it forecast, saying it expects adjusted earnings per share of $6.75 to $6.90, up from $6.68 to $6.88. The improved outlook remains below analyst expectations headed into 2019.

Write to Sharon Terlep at sharon.terlep@wsj.com and Anna Wilde Mathews at anna.mathews@wsj.com

(END) Dow Jones Newswires

May 01, 2019 13:17 ET (17:17 GMT)

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