A person walks past a CVS Pharmacy in Manhattan, New York, on November 15, 2021.
Andrew Kelly | Reuters
CVS Health reported mixed third-quarter results on Wednesday as higher medical costs weighed on its bottom line. The earnings report is CEO David Joyner's first at the helm of the troubled drugstore chain.
The company expects increased medical costs to continue to weigh on its performance this year, “and therefore we are not providing a formal outlook at this time,” a spokesperson told CNBC.
“Building credibility and earning the trust of our investors is one of my top priorities as the new leader of CVS Health,” Joyner said in a statement. “To achieve this, any guidance we provide should be achievable and provide clear opportunities for outperformance. That is a fundamental principle for me.”
CVS won't provide formal 2025 guidance until next year, when the company has a better view of its changing membership base and medical cost base for 2024, CFO Tom Cowhey said during a conference call Wednesday.
Wall Street's confidence in CVS has fallen this year after it cut full-year forecasts for three straight quarters, sparking pressure from an activist investor to turn around the business.
The company's shares are down nearly 27% for the year as higher medical costs at its health insurance unit Aetna hit profits, driven by seniors returning to hospitals to undergo procedures they needed during the Covid-19 pandemic. pandemic had postponed.
“While the entire industry saw increased utilization due to the pandemic, we were hit harder than others,” Joyner said. “Our top priority remains ensuring the stability of the company.”
Also on Wednesday, CVS named a new president for Aetna, effective immediately: Steve Nelson, the former CEO of health care giant UnitedHealthcare, a division of United Health Group. Joyner and Nelson are tasked with convincing investors that CVS can get back on track and better manage higher-than-expected costs.
Meanwhile, the company's longtime chief executive, Prem Shah, will take on a new, expanded role, overseeing the company's retail pharmacy, pharmacy benefits and health care businesses, CVS said.
Shares of CVS rose more than 10% on Wednesday.
Here's what CVS reported for the third quarter compared to Wall Street's expectations, based on an analyst survey from LSEG:
- Earnings per share: $1.09 adjusted vs. $1.51 expected
- Revenue: $95.43 billion versus expected $92.75 billion
When CVS announced Oct. 18 that Joyner had succeeded former CEO Karen Lynch, the company also said it had conducted a strategic review that included layoffs, writedowns and the closure of 271 additional retail stores. Those moves came in addition to a plan announced in August to cut spending by $2 billion over the next few years, which would involve cutting nearly 3,000 jobs, or less than 1% of the workforce.
CVS reported third-quarter revenue of $95.43 billion, up 6.3% from the same period last year, driven by growth in its pharmacy business and insurance division.
The company reported third-quarter net income of $71 million, or 7 cents per share. In comparison, net income in the year-ago period was $2.27 billion, or $1.75 per share.
Excluding certain items such as amortization of intangible assets, restructuring charges and capital losses, adjusted earnings per share for the quarter were $1.09. That's in line with the estimate the company provided last month.
Adjusted and unadjusted earnings also included a charge of 63 cents per share, or $1.1 billion, from so-called insurance premium deficiency reserves related to expected losses in the fourth quarter of 2024.
This refers to a liability that an insurer may need to cover if future premiums are not sufficient to cover expected claims and costs. Premium deficit reserves “are effectively an acceleration of future losses and shift the revenue cadence between the third and fourth quarters,” a spokesperson told CNBC.
CVS expects these premium deficit reserves to be “substantially released” in the fourth quarter, which will benefit its results in that period. The spokesman said CVS does not expect to record a premium deficiency provision for 2025.
However, if medical costs continue to rise, Cowhey said the company could see another charge related to expected losses in 2025, which would “further weigh on” results this year.
CVS also recorded third-quarter restructuring charges of 93 cents per share, or $1.17 billion. That includes $607 million for additional store closures in 2025 and $293 million related to layoffs.
Pressure on the insurance unit
CVS's insurance business reported revenue of $33 billion in the quarter, up more than 25% from the third quarter of 2023. The division reported an adjusted operating loss of $924 million for the third quarter.
The insurance unit's medical benefit ratio – a measure of total medical costs paid relative to premiums collected – rose to 95.2% from 85.7% a year ago. A lower ratio typically indicates that a company has collected more in premiums than it has paid out in benefits, leading to higher profitability.
CVS's health services segment generated revenue of $44.13 billion in the quarter, down nearly 6% from the same quarter in 2023.
This unit includes Caremark, one of the nation's largest pharmacy benefit managers. Caremark negotiates drug discounts with manufacturers on behalf of insurance plans, creates lists of drugs – or prescription lists – covered by insurance, and reimburses pharmacies for the cost of prescriptions.
CVS' health services division processed 484.1 million pharmacy claims in the quarter, down from 579.6 million in the year-ago period.
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The company's pharmacy and consumer wellness division reported third-quarter revenue of $32.42 billion, up more than 12% from the same period last year. This unit dispenses prescriptions at CVS's more than 9,000 retail pharmacies and provides other pharmacy services such as vaccinations and diagnostic testing.
CVS said the increase was due in part to increased prescription volume. Reimbursement pressure from pharmacies, the introduction of new generics and lower store volume, also due to a smaller number of branches, weighed on the unit's sales.
In a statement, Joyner said CVS's share of the retail pharmacy market was at 27.3%, an all-time high.
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