CVS Health Announces Weak Outlook for Profit

CVS Health Corp has spooked investors by releasing an outlook for weak profit for 2016. This underscores the concerns that its margins would continue suffering from lower rates of reimbursement for the dispensing of medications.

CVS shares dropped by 5% in trading early on Friday after the company said that its earnings for 2016 would be $5.68 to $5.88 per share, which was far below the target of $6.02 forecast by Wall Street.

The earnings goals for CVS falls within its annual 11% to 14% target for growth, but includes its latest acquisitions such as Omnicare, Inc, which dispenses medications to different nursing homes.

Industry analysts as well as investors were worried that the addition of Omnicare along with its acquisition of Target’s pharmacy business, which is pending, masked a core business slowdown at CVS.

Executives at CVS said the rates of reimbursement were under pressure as additional drugs are being dispensed through federal Medicaid and Medicare programs, which have lower margins than with private insurers.

However, the same executives said the rates of reimbursement are not getting any worse than was expected.

Drugstores nationwide are seeing profits squeezed as the rate reimbursement has dropped.

Part of that is growth of narrow networks that have been created by the pharmacy benefit managers that are able to steer more of the patients to a particular pharmacy.

Those are becoming more popular as they help patients save more money but put more pressure on the pharmacies because of the reimbursement rates being even lower and they have higher fees.

One way chains of pharmacies were addressing this pressure is through scale. CVS is acquiring the 1,600 plus Target pharmacies a deal worth $1.9 billion, which is scheduled to close in 2016.

At the same time, Walgreens Boots Alliance, said earlier in the week that it had agreed to acquire Rite Aid Corp for over $9.4 billion, a deal that will combine two of the biggest three chains by number of stores.

CVS also reported its profit for the third quarter had increased by close to one third to just over $1.25 billion, as revenue grew from its managing drug plans that offset weaker growth in its stores.

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