By Caroline Humer and Manas Mishra
(Reuters) – CVS Health Corp on Wednesday forecast 2019 profit well below Wall Street estimates due to weakness in its pharmacy business that serves long-term care facilities and slower than anticipated growth in drug prices, sending shares down 8 percent.
The lowered forecast raised questions on Wall Street about the company’s ability to succeed with its $69 billion acquisition of health insurer Aetna, which closed last year.
CVS said the rebates, or discounts, that are a pillar of the pharmacy benefit management (PBM) business model, are an issue for 2019 as well. The U.S. government has proposed a rule that would overhaul the use of drug company rebates in government-run healthcare plans.
Chief Executive Larry Menlo said the proposed rule, which the Trump administration plans to put in place on Jan. 1, 2020, would force CVS to raise premiums in Medicare prescription drug plans if implemented.
Menlo said in an interview that there are practical issues with implementing the proposal. Companies are required submit bids to the government for the 2020 Medicare drug plans by early June of this year.
“It’s very difficult for folks to begin to take actions today recognizing that no one completely understands exactly what the rule is,” Menlo said. “It just seems that a Jan. 1 go-live date would be very challenging to achieve.”
CVS plans to suggest changes to the proposed rule.
Other challenges the company faces in 2019 include declining revenue from new generic drugs, Menlo said. In a typical generic launch, several competitors begin selling their versions within a year, giving CVS the ability to leverage rivals for competitive pricing.
But high-profile generic launches in 2019 have involved more complex treatments, including rivals to Mylan NV’s EpiPen, and GlaxoSmithKline’s Advair for asthma.
“It’s a more difficult manufacturing process and as a result the regulatory process to market is more challenged,” Menlo said. “So we’re seeing – on some of these products – less competition.”
Teva Pharmaceutical Industries, for instance, has been selling its generic EpiPen at $300, about the same as Mylan’s. Mylan just launched its generic of Advair in February.
CVS provided its 2019 forecast for adjusted earnings of $6.68 to $6.88 per share, compared with Wall Street estimates of $7.41, along with its first quarterly results since closing the Aetna deal.
CVS faced “a perfect storm” of challenges and now faces a longer road until the combination can work and create value, Evercore ISI analysts Ross Muken and Michael Newshel said in a research note.
“This will help to stoke fears of the Aetna transaction being a defensive maneuver, aimed at plugging holes in a leaky CVS bucket,” they wrote.
Slowing growth of prescription drug prices, as drugmakers have caved to pressure from politicians to lower costs for U.S. consumers, has hit the outlook for the size of rebates manufacturers give CVS in return for coverage of their medicines by its PBM business.
The unexpected slowdown will squeeze CVS profits because it has already guaranteed rebates in set dollar amounts to PBM clients, such as health plan managers and employers.
CVS, which owns a large chain of pharmacies in addition to its PBM and now insurance business, also revealed a $2.2 billion fourth-quarter goodwill impairment charge related to its long-term care business, which includes the Omnicare unit it bought in 2015. It took a $3.9 billion charge in the second quarter.
The company pointed to low occupancy rates in skilled nursing facilities and a significant customer bankruptcy.
The focus on issues facing the company overshadowed higher-than expected fourth-quarter profit.
CVS said it earned $2.14 per share excluding items, beating analysts’ average estimate by 9 cents.
Shares of the company were down 8 percent at $64.18 after falling as low as $63.31 earlier on Wednesday.
(Reporting by Aakash Jagadeesh Babu and Manas Mishra in Bengaluru and Caroline Humer in New York; Editing by Saumyadeb Chakrabarty and Bill Berkrot)