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CVS Feels the Pain Before the Potential Gain

Max Nisen
CVS Feels the Pain Before the Potential Gain

(Bloomberg Opinion) -- It turns out that integrating a giant health insurer and pioneering a business model isn’t a cakewalk. On Wednesday, CVS Health Inc. released its first full-year guidance since closing its $68 billion deal for Aetna Inc. in November. The firm’s earnings-per-share forecast came in below Wall Street’s lowest estimates.  

The pharmacy giant outlined pricing headwinds at a January conference that it said could weigh on earnings, and it looks as if they’re blowing hard. In its fourth-quarter earnings release, CVS said that these issues would have a disproportionate impact in 2019, implying that they’ll fade to some extent. 

But while a conservative first-year forecast doesn’t derail the long-term logic of the transaction, it may be some time before investors see the benefits. 

A few of the issues CVS is facing will most likely fade fairly quickly. Some of the initial pain of integrating Aetna is likely to pass. So should a particularly poor year for profitable generic drug launches. 

Other problems, however — particularly some significant threats to the firm’s pharmacy benefit management business — aren’t going anywhere. In its January presentation, the firm cited lower price increases from drugmakers as a possible drag on profits. Increases almost certainly aren’t going back to historical levels given intense public and political scrutiny of the practice.

The Trump administration is actively working to make price increases permanently less profitable for PBMs. It proposed a rule this month that would unfavorably upend the way that CVS functions in Medicare Part D, and it wants to push similar reforms into the larger and more profitable commercial market. Individual states are also taking a close look at other ways that PBMs profit from government programs. The Medicare rule won’t hit until 2020 at the earliest, but CVS is already shifting its business model, and profit growth is slowing. 

Facing this grim environment without Aetna probably would have been even worse. The insurer offers a potentially profitable captive customer base for both sides of the business and a ready-made opportunity to expand into a broader range of health-care services. The combination of a huge retail presence and a large health insurance business is unique and potentially promising. 

But there is a lot of investment and experimentation to come before the theoretical benefits of the combination translate into actual results. 

Investors that stick it out might be rewarded. But juggling a major integration, a big debt load and a shifting regulatory environment all at once was never going to be anything but incredibly difficult. 

To contact the author of this story: Max Nisen at mnisen@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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