A person walks past a CVS Pharmacy store in Manhattan, New York, on November 15, 2021.
Andrew Kelly | Reuters
CVS Health It reported mixed third-quarter results on Wednesday as higher medical costs dragged down its results. The earnings report is CEO David Joyner's first at the helm of the troubled retail pharmacy chain.
The company expects elevated medical costs to continue to pressure its performance this year, “and as a result we are not providing a formal outlook at this time,” a spokesperson told CNBC.
“Establishing 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 must be actionable, with clear opportunities to achieve superior performance. This is a fundamental principle for me.”
CVS won't give formal guidance for 2025 until next year, when the company has better visibility into its membership changes and medical cost baseline for 2024, Chief Financial Officer Tom Cowhey said during an earnings conference call Wednesday. .
Wall Street's confidence in CVS has deteriorated this year after three straight quarters of cuts to its full-year forecast, prompting pressure from an activist investor to turn the business around.
The company's shares are down nearly 27% for the year as higher medical costs at its health insurance unit, Aetna, hit its profits, reflecting seniors returning to hospitals for procedures. that they had delayed during the Covid-19 pandemic.
“While the entire industry has seen elevated utilization in the wake of the pandemic, we have been impacted more than others,” Joyner said. “Our immediate priority remains ensuring the stability of the business.”
Also on Wednesday, CVS named a new president for Aetna, effective immediately: Steve Nelson, former CEO of health care giant UnitedHealthcare, a division of UnitedHealth Group. Joyner and Nelson are tasked with convincing investors that CVS can get back on track and better manage higher-than-expected costs.
Meanwhile, Prem Shah, a longtime company executive, will take on a new and expanded role overseeing the company's retail pharmacy, pharmacy benefits and healthcare delivery businesses, CVS said.
CVS shares rose more than 10% on Wednesday.
Here's what CVS reported for the third quarter compared to what Wall Street expected, according to a survey of analysts by LSEG:
- Earnings per share: $1.09 adjusted vs. $1.51 expected
- Revenue: $95.43 billion vs. $92.75 billion expected
On Oct. 18, when CVS announced that Joyner had succeeded former CEO Karen Lynch, the company also said it had conducted a strategic review that included layoffs, amortizations and the closure of 271 more retail stores. Those actions were in addition to a plan announced in August to cut $2 billion in spending over the next few years, including cutting nearly 3,000 jobs, or less than 1% of its workforce.
CVS reported sales of $95.43 billion for the third quarter, up 6.3% from the same period a year ago due to growth in its pharmaceutical business and insurance unit.
The company posted net income of $71 million, or 7 cents per share, during the third quarter. That compares with net income of $2.27 billion, or $1.75 per share, in the same period a year earlier.
Excluding certain items, such as amortization of intangible assets, restructuring charges and capital losses, adjusted earnings per share were $1.09 for the quarter. This is in line with the estimate the company provided last month.
The adjusted and unadjusted earnings also included a charge of 63 cents per share, or $1.1 billion, of so-called premium deficiency reserves in its insurance business related to anticipated 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 pay anticipated claims and expenses. The premium deficiency reserves “are effectively an acceleration of future losses, changing the cadence of earnings between” the third quarter and the fourth quarter, a spokesperson told CNBC.
CVS expects those premium deficiency reserves to “be substantially released” during the fourth quarter, which will benefit results in that period. The spokesperson said CVS does not expect to reserve a premium deficiency reserve for 2025.
But if higher medical costs persist, Cowhey said the company could record another charge related to anticipated losses in 2025, which would “further pressure” this year's results.
CVS also recorded restructuring charges of 93 cents per share, or $1.17 billion, in the third quarter. That includes $607 million for additional stores it plans to close in 2025 and $293 million related to layoffs.
Pressure on the insurance unit
CVS' insurance business posted $33 billion in revenue during 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 expenses paid relative to premiums collected) rose to 95.2% from 85.7% a year earlier. A lower ratio generally indicates that a company collected more in premiums than it paid in profits, resulting in higher profitability.
CVS' healthcare segment generated $44.13 billion in revenue during the quarter, down nearly 6% from the same quarter in 2023.
That unit includes Caremark, one of the nation's largest pharmacy benefit managers. Caremark negotiates drug discounts with manufacturers on behalf of insurance plans and creates lists of medications (or formularies) that are covered by insurance and reimburses pharmacies for prescriptions.
CVS' healthcare division processed 484.1 million pharmacy claims during the quarter, up from 579.6 million during the same period a year earlier.
The company's pharmacy and consumer wellness division posted $32.42 billion in sales during the third quarter, up more than 12% from the same period a year earlier. That unit dispenses prescriptions at more than 9,000 CVS retail pharmacies and provides other pharmacy services, such as vaccinations and diagnostic tests.
The increase was due in part to increased prescription volume, CVS said. Reimbursement pressure from pharmacies, the launch of new generic drugs and lower volume in stores, including due to the decrease in the number of stores, weighed on the unit's sales.
In a statement, Joyner said CVS's share of the retail pharmacy market is 27.3%, an all-time high.