The Challenges Ahead for CVS Pharmacy
New Earnings Guidance and Impact on Industry
A person walks by a CVS Pharmacy store in Manhattan, New York, on Nov. 15, 2021.
CVS Pharmacy, a leading drugstore chain, has revised its adjusted earnings guidance for 2024, lowering it to at least $7 per share compared to the previous guidance of at least $8.30 per share. This update comes as a disappointment to analysts who were expecting full-year adjusted profits of $8.28 per share. Simultaneously, the company has also reduced its unadjusted earnings guidance from at least $7.06 per share to at least $5.64 per share.
CVS cites higher medical costs in its insurance business during the first quarter as the primary reason for the revised outlook, as the impact is expected to persist throughout the year. Notably, CVS Health owns the health insurer Aetna. Despite the challenging environment, CVS CEO Karen Lynch remains confident in the company’s long-term earnings power and the opportunities that lie ahead.
Medicare Advantage has been a significant source of growth for the insurance industry, including insurers like Humana and UnitedHealth Group. However, the return of more Medicare Advantage patients to hospitals for delayed procedures, compounded by increased expenses during the pandemic, has led to a spike in medical costs. This current trend has genuine implications for the industry.
Quarterly Results and Industry Impact
- Earnings per share: $1.31 adjusted vs. $1.69 expected
- Revenue: $88.44 billion vs. $89.21 billion expected
In the first quarter, CVS reported net income of $1.12 billion, a decrease from $2.14 billion during the same period last year. Excluding certain items, adjusted earnings per share were $1.31, and sales amounted to $88.44 billion, a 4% increase from the previous year. While the pharmacy business and insurance unit drove the sales increase, the health services segment experienced a decline due to the loss of a large unnamed client.
The decision of Tyson Foods to drop CVS’s Caremark and partner with PBM startup Rightway, as well as Blue Shield of California’s transition to Amazon Pharmacy and Cost Plus Drugs, demonstrates the shifting dynamics of the industry. Startups offering lower costs and increased transparency are disrupting the largest pharmacy benefit managers (PBMs), pressuring them to update their business models. This industry-wide upheaval is a primary factor influencing the financial results of CVS Pharmacy.
A workers stocks the shelves in a CVS pharmacy store on February 07, 2024 in Miami, Florida.
Segment Performance and Shifts within CVS
CVS’s health insurance segment, consisting of Aetna’s plans for the Affordable Care Act, Medicare Advantage, and Medicaid, generated $32.24 billion in revenue for the first quarter, marking a significant increase of over 24% from the same quarter in 2023. However, the adjusted operating income for the health insurance segment fell short of expectations, totaling $732 million instead of the anticipated $1.19 billion. Analysts attribute the discrepancy to increased utilization of Medicare Advantage and the impact of Medicare Advantage star ratings on CVS.
The health services division, including CVS Caremark and various health-care services, saw a nearly 10% drop in revenue compared to the first quarter of 2023. The decrease is primarily attributed to the loss of an unnamed client and “continued pharmacy client price improvements.” However, CVS experienced growth in Oak Street Health, Signify Health, and specialty pharmacy services. The division processed 462.9 million pharmacy claims during the quarter.
CVS’s pharmacy and consumer wellness division recorded $28.73 billion in sales for the first quarter, marking a 3% increase primarily driven by heightened prescription volume, including vaccine contributions. However, reimbursement pressure, the introduction of generic drugs, and decreased front-store volume affected the division’s sales.
CVS’s transformations from a major drugstore to a diversified health-care company, including recent acquisitions of Signify Health and Oak Street Health, reflect the company’s commitment to adapt to an evolving industry.
Conclusion
CVS Pharmacy’s revised earnings guidance and the industry’s increasing concern over the costs associated with Medicare Advantage plans indicate significant challenges. The company’s commitment to addressing these challenges and pursuing its transformational goals remains optimistic. However, the shifting dynamics, disruptive startups, and evolving consumer preferences underscore the need for continuous adaptation and innovation within the healthcare industry.
