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Wednesday, 05/03/2023 11:36:47 AM

Wednesday, May 03, 2023 11:36:47 AM

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CVS Health reports 11% sales growth but cuts full-year earnings outlook as Oak Street deal closes
By: Morningstar | May 3, 2023

Revenues rise across all major business segments, even as regulatory pressures build on prescription-drug middlemen and Medicare Advantage

CVS Health (CVS) reported first-quarter earnings that beat analyst expectations Wednesday but cut its full-year guidance as it digests the acquisition of primary-care provider Oak Street Health.

The early close of the $10.6 billion deal for Oak Street, completed on Tuesday, "will be a short-term headwind" for 2023 earnings, CVS president and CEO Karen Lynch said on a conference call with analysts Wednesday. CVS cut its 2023 guidance for adjusted per-share earnings to a range of $8.50 to $8.70, down from $8.70 to $8.90.

Net income fell to $2.14 billion, or $1.65 per share, from $2.36 billion, or $1.77 per share, in the year-ago period. Excluding nonrecurring items, adjusted earnings per share fell to $2.20, from $2.30 a year earlier, but topped the FactSet consensus of $2.09. Revenue grew 11% to $85.28 billion, beating the FactSet consensus of $80.79 billion.

First-quarter revenues jumped in all three of CVS's major business segments, including healthcare benefits, health services, and pharmacy and consumer wellness.

The Oak Street acquisition comes on the heels of CVS's $7.8 billion acquisition of Signify Health, completed in March, boosting the company's presence in in-home services.

In the health services segment, which includes CVS's pharmacy benefit management business, revenues jumped 12.5% from a year earlier, to $44.59 billion, as the number of pharmacy claims processed increased 4% to 587 million. The results come as CVS, like other major players in the pharmacy benefit management business, faces growing scrutiny at the federal and state level. In Congress, lawmakers on both sides of the aisle have shown interest in reforming some PBM business practices, and executives from CVS and other major PBM players are slated to testify next week before the Senate Health, Education, Labor and Pensions Committee.

CVS has been targeted in some recent state-level actions against PBMs. The Minnesota Department of Commerce earlier this week fined CVS's Caremark PBM arm $500,000, alleging that the company steered patients to pharmacies or mail-order prescription services in which it had an ownership interest. And the Oklahoma Insurance Commission last month filed an administration action against CVS Caremark, alleging similar violations of state law.

CVS did not respond to a request for comment on the state actions. On the conference call Wednesday, Lynch addressed the scrutiny of PBMs generally, saying, "PBMs have consistently been found to operate in a highly efficient market and drive real savings to healthcare customers and members. Every day we deliver product choices for clients and members that help make care more affordable, accessible and simple."

Medicare Advantage is a key growth area for CVS but also faces regulatory pressures, as the federal government adjusts reimbursement rates and makes other tweaks that analysts expect may cut into industry growth. Heady Medicare Advantage growth rates seen in recent years "may decelerate and create some risk to the industry's 2024 growth prospects, in particular," Morningstar analyst Julie Utterback wrote in a recent research note.

"We have a long history of successfully working within Medicare Advantage funding levels to support program stability for our members," Lynch told analysts on the conference call Wednesday. CVS said it expects 12% membership growth in its Medicare Advantage business for the full year 2023. In late March, the City of New York awarded a Medicare Advantage contract for roughly 250,000 city retirees to CVS's Aetna unit--one of the largest client wins in Aetna's history, CVS said.

The end of the COVID-19 public health emergency next week will also make its mark on CVS, Lynch noted on the call Wednesday. The company's Medicaid business saw increased membership in the first quarter, Lynch said, but declines are expected for the rest of the year, after expiration of the public health emergency.

Pandemic-era legislation included a requirement that Medicaid programs keep people continuously enrolled for the duration of the public health emergency, but states can now resume redeterminations of eligibility, which may cause millions of people to lose health coverage, analysts say.

"As Medicaid members face potential disruption in their health benefits, we are using the full breadth of our portfolio of assets to help them avoid coverage losses and maintain positive health outcomes," Lynch said on the call.

In its retail business, CVS remains on track to close 300 stores this year and a cumulative total of 900 stores by 2024, Lynch said.

CVS shares are down 24% in the year to date, while the Health Care Select Sector SPDR ETF (XLV) is down 1.1% and the S&P 500 is up 7.7%.

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