With medical costs continuing to rise and affecting CVS Health's (CVS, Financial) FY24 EPS outlook, the company is making significant changes. CEO Karen Lynch is replacing the top executive at Aetna, CVS's insurance arm, after another disappointing quarter. Additionally, CVS announced a $2.0 billion cost-cutting plan, leveraging AI to streamline operations.
Similar to other retail pharmaceutical companies, CVS is grappling with economic challenges. Walgreens Boots Alliance (WBA, Financial) announced in June that it would close around 25% of its U.S. stores and is reviewing its Boots U.K. business. Meanwhile, Rite Aid filed for Chapter 11 bankruptcy in October, closing hundreds of locations nationwide.
Investor reactions are mixed. While CVS's overhaul could counteract rising medical costs, it may take months to see tangible benefits, especially given the uncertain economic environment.
- CVS's Q2 results: EPS of $1.83 and revenue of $91.23 billion, reflecting a 17% decline and a 2.6% increase year-over-year, respectively. In Health Care Benefits, including Aetna, the medical benefit ratio (MBR) rose 340 basis points year-over-year to 89.6%, leading to a 39.1% drop in adjusted operating income. The decline was attributed to lower Medicare Advantage star ratings for 2024.
- Pharmacy & Consumer Wellness: Revenue increased by 3.7% year-over-year, supported by higher prescription volume and drug mix. However, this was partially offset by pharmacy reimbursement pressure, increased generic drugs, and declining front store volume. CVS did manage to grow its pharmacy market share.
- Health Services: Revenue contracted by 9% year-over-year. Highlights include record volume from Signify and a nearly 30% increase in at-risk patients from Oak Street. However, these were overshadowed by the loss of a large client and ongoing pharmacy client price improvements.
- Looking ahead: CVS lowered its FY24 EPS outlook to $6.40-6.65 from at least $7.00, down from an initial outlook of at least $8.50. The company also increased its MBR forecast to 90.6-90.8% from 89.8%.
Rising costs are expected to remain a significant issue for CVS. The MBR usually increases in the latter half of the year as patients schedule more procedures. CVS warned that if MBR trends remain high, it might need to take an in-year 2024 premium deficiency reserve in its Medicare business, affecting EPS between Q3 and Q4. We continue to advise caution regarding a rebound in CVS due to ongoing uncertainties.
