Dive Brief:
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Pharmacy giant CVS Health said the expected close date for its $69 billion megamerger with Aetna will be before Thanksgiving as the deal awaits regulatory approval from five states.
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CVS has consistently topped earnings estimates over the past four quarters and Q3 was no different. It reported $33.8 billion in pharmacy services, up 2.6% from same quarter last year and driven by growth in pharmacy network and mail choice claim volume. Pharmacy network claims increased by 5.4% in the quarter to almost 400 million and mail choice claims increased 7.4% to almost 72 million. Brand inflation also played a role, according to the company's earnings report.
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The pharmacy chain reported overall revenue of $47.3 billion in Q3, up 2.4% or $1.1 billion from the same quarter last year and a tad higher than the Zack's Investment Research estimate of $47.2 billion. Net income for the Woonsocket, Rhode Island-based company was $1.4 billion, up 8.2% from Q3 2017. The increase was primarily due to the lower corporate tax rate enacted in December 2017. Operational cash flow and consolidated operating profit fell by 21.6% and 5.8%, respectively.
Dive Insight:
October was a pivotal month for the health and pharmacy giant as the Department of Justice approved a massive $69 billion merger between CVS and Aetna, expected to close in just a few weeks amid a landscape shaken by rampant M&A activity.
The vertical deal will create a combined company with significant market share in both the pharmacy and healthcare insurance industries and an estimated annual revenue of $245 billion.
Though CVS and Aetna continue to trumpet the $750 million in potential cost savings from the merger, there's concern the marriage could lead to anti-competitive practices. Those worried include the American Medical Association (in June and August), California's insurance commissioner, a top New York financial watchdog and the advocacy group Consumers Union.
To clear antitrust hurdles, Aetna has agreed to sell its standalone Medicare Part D prescription drug plans to a WellCare subsidiary upon completion of the merger.
At an Economic Club of Washington event following the DoJ's acquiescence, CVS CEO Larry Merlo said pairing CVS pharmacy data with Aetna's medical benefit data will result in easier access to health services, along with lower costs and more smoothly coordinated care.
Potentially the largest healthcare merger in history, the deal has received approval from 23 of the 28 necessary states to date and is close to getting the remaining five, Merlo said on the Q3 earnings call Tuesday morning. CVS-Aetna is "pretty far down the road" with the New York financial services department and "in the process of finalizing paperwork" with California.
New Jersey, which was the last state to have a hearing just this week, and two other states are close to giving the deal their nods as well, in time for its to close before the holiday season.
The earnings come amid speculation that CVS is thinking about entering the urgent care market, a move likely to frustrate hospital systems and existing urgent care companies alike.
It wouldn't be difficult for CVS to sidle closer to an urgent care model — it's a step removed from the chain's 1,100 retail clinics existing suite of services. The company would only need to add more X-ray, intravenous, suturing and blood-draw capabilities to qualify as urgent care, but it would have a ways to go to catch up with competitor Walgreens, which has built out a partnership with UnitedHealth's MedExpress for roughly a year now.
Moving closer to primary care would just mean a "shifting of investment" within existing capital expenditures, said CVS executive vice president, controller and chief accounting officer Eva Boratto on the earnings call. Boratto will be CFO of the combined CVS-Aetna entity once the transaction closes.
As outpatient continues to grow in popularity and money-making potential, acquisition of urgent care facilities and expansion of outpatient footprint has become more of a priority for hospital chains and physician groups. Any CVS interference has the potential to seriously hurt their bottom lines.
In its Q3 earnings, CVS also saw its revenues in its retail/long-term care segment increase 6.4% to about $20.9 billion due to an increase in same-store prescription volume, continued adoption of patient care programs, alliances with PBMs and health plans, brand inflation and increased inclusion in additional Medicare Part D networks this year.
Same-store sales increased 6.7% and pharmacy same-store sales increased 8.7%, both higher than analyst forecasts. Front store same-store sales increased almost 1%.
Operational cash dropped by almost 22% to $6.4 billion in the quarter, and consolidated operating profit dwindled by almost 6% to $2.4 billion. CVS attributed these decreases to higher Q3 costs related to merger integration and finalization, along with investment of savings from the tax cut. Operating expenses associated with business growth also rose in the quarter.
Diluted earnings per share from continuing operations was $1.36 and adjusted earnings per share was $1.73, up 7.9% and 15.3% from Q3 2017, respectively — a bit higher than analyst expectations. Shares of CVS were up nearly 3% in premarket trading Tuesday.
Merlo reiterated on the earnings call that the year two synergy plan for the merger is "largely complete."
CVS hasn't had access to Aetna's detailed financials, so the company can't issue specific guidance for 2019. But next year will be "highly focused on the integration of the businesses” and the establishment of the new healthcare model," Boratto said.
CVS expects GAAP operating profit to decline by 39% to 41% for 2018, reflecting goodwill impairment in the second quarter. Adjusted operating profit is likely to stay about the same. GAAP diluted earnings per share from continuing operations is expected to be $1.40 to $1.50 and adjusted earnings per share to be $6.98 to $7.08. Operational cash flow will be about $9 billion and free cash flow will be $7 billion.