CVS earnings outpace expectations as Aetna deal chugs along

On the cusp of completing a $69 billion merger with the nation’s third-largest health insurance provider, Aetna, CVS Health reported strong earnings that beat analysts’ expectations.

The company’s earnings were lifted by an increase in same-store prescriptions and network growth during the quarter. Executives were still bullish on the ongoing merger with Aetna, which is expected to close before Thanksgiving, they announced during CVS’ third-quarter earnings call.

CVS reported net revenues of $47.3 billion during the third quarter of 2018, a 2.4 percent increase from the same time period in 2017 and above the $47.2 billion expected. Earnings per share were $1.73 adjusted, compared to the $1.71 that was expected, according to CNBC.

Aetna also reported stronger earnings for the quarter, with $1 billion income. CVS’ stock price jumped more than 4.5 percent as of mid-day trading Tuesday upon release of the company’s earnings.

“While CVS and Aetna remain separate companies today, the performance of both companies highlights the very solid financial foundation on which we’ll build our revolutionary new model that will transform the health care experience for consumers and, in the process, deliver substantial value for our shareholders,” CVS Health CEO Larry Merlo said in a statement.

Aetna deal

CVS and Aetna announced their plan to merge late in 2017, and the deal received preliminary approval from the Department of Justice on Oct. 10. The DOJ required that Aetna divest its Medicare Part D prescription drug business, which WellCare Health Plans announced it would acquire in September.

The merger, which brings together one of the nation’s largest insurance providers and retail pharmacy and pharmacy benefits managers (PBMs), is valued at $69 billion. It has cleared 23 out of 28 state approvals needed, including Connecticut.

Late in October, New York regulators signaled they are still looking into concerns over the merger. However, the hold-up may be more of a “negotiating tactic,” according to Leerink Partners.

Part of the issue may be Aetna’s decision to keep its headquarters in Connecticut, which the insurer announced it will do for the next decade. The decision may have ruffled some feathers in New York, which was previously being considered as Aetna’s new home for its headquarters.

“The issue New York has [is] Aetna was planning to move the headquarters to New York,” Brian Tanquilut, analyst at Jefferies, told HealthExec. “And now it’s not going to happen because Aetna committed to Connecticut, and New York feels like they got shafted. The government stuck their neck out to get incentives [for Aetna], and then Aetna walked away from New York.”

As New York regulators continue to review the deal, they could look for ways to boost jobs in New York or force the CVS PBM to provide more disclosures. They may even go after the health plan business for New York, according to Tanquilut, who speculated that New York may simply want something more for the state from the deal.

CVS still expects the deal to close before Thanksgiving, according to the company’s quarterly earnings presentation. The company expects year-two synergies in excess of $750 million.

CVS initiatives

Beyond Aetna, CVS is rolling out new initiatives that promote telehealth, including MinuteClinic Video Visits. The company will continue to look for more opportunities to expand the capability.

“[We’ve] been rolling it out state by state,” CEO Larry Merlo said during the company’s third-quarter earnings call with investors. “... Once we get more of a critical mass, we will begin broader marketing of that as we look at [the] complimentary strategy to the clinics. It has the opportunity to expand outreach and our scope of practice. …More to come.”

Merlo has also touted the new model the combined CVS-Aetna entity will create. The model aims to serve individuals in the communities where they live, providing care and services in and out of CVS retail stores. The services and retail pharmacy can complement physician services, according to Merlo.

Most recently, CVS announced it was piloting a new membership program in Boston that would include discounts on CVS-brand items and free delivery on prescriptions and online sales. The move is largely seen as an effort to thwart its retail competitor Amazon, which has recently started offering its own over-the-counter medicine business and acquired online pharmacy PillPack for $1 billion.

CVS also reported its PBM revenues rose 2.6 percent to $33.8 billion during the quarter. CVS also completed more than 90 percent of client renewals year to date, with a retention rate near 98 percent.