CVS Health (CVS) Q3 2024 earnings

CVS Health On Wednesday, it reported mixed third-quarter results as rising medical costs put pressure on its bottom line. The earnings report is CEO David Joyner's first at the helm of the struggling retail pharmacy chain.

The company expects higher medical costs to continue to weigh on its performance this year, “and as a result, we are not providing a formal forecast at this time,” a company spokesperson told CNBC. CVS will provide commentary on what it expects “live” during the earnings call, the spokesperson said.

“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 achievable, with clear opportunities to outperform. This is a fundamental principle for me.”

Wall Street's confidence in CVS has deteriorated this year after three straight quarters of full-year guidance cuts, leading to pressure from an activist investor to turn around the business.

The company's shares are down nearly 27% this year, as rising medical costs at its health insurance unit, Aetna, erode its profits, reflecting the return of seniors to hospitals to undergo procedures they delayed during the Covid-19 pandemic.

“While the entire industry has seen elevated usage as a result of the pandemic, we have been impacted more severely than others,” Joyner said. “Our immediate priority remains ensuring business stability.”

Also on Wednesday, CVS named a new president for Aetna, effective immediately: Steve Nelson, former CEO of healthcare giant UnitedHealthcare, a division of UnitedHealth Group. Joyner and Nelson were tasked with convincing investors that CVS could get back on track and better manage higher-than-expected costs.

Meanwhile, Prem Shah, the company's longtime CEO, will take on a new, expanded role overseeing the company's retail pharmacy, pharmacy benefits and health care delivery businesses, CVS said.

CVS shares rose nearly 6% in premarket trading Wednesday.

Here's what CVS reported for the third quarter compared to what Wall Street was expecting, based on a survey of analysts conducted by LSEG:

Earnings per share: $1.09 adjusted vs. $1.51 expected Revenue: $95.43 billion vs. $92.75 billion expected

On October 18, when CVS announced that Joyner had replaced former CEO Karen Lynch, the company also said it had conducted a strategic review that included layoffs, asset writedowns and the closure of another 271 retail stores. These measures were in addition to a plan announced in August to cut $2 billion in expenses over the next few years, which includes 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 last year due to growth in its pharmacy business and insurance unit.

The company had net income of $71 million, or 7 cents per share, for the third quarter. This compares to net income of $2.27 billion, or $1.75 per share, in the corresponding 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 consistent with the estimate the company provided last month.

Adjusted and unadjusted earnings also included a charge of 63 cents per share, or $1.1 billion, from so-called “premium deficiency reserves” in the insurance business related to losses expected in the fourth quarter of 2024.

This refers to the liability that an insurance company may need to cover if future premiums are insufficient to pay expected claims and expenses. The premium shortfall reserves “effectively represent an acceleration of future losses, shifting the pace of earnings between” the third quarter and the fourth quarter, a spokesperson told CNBC.

CVS expects these premium shortfall reserves to be “released significantly” during the fourth quarter, which will benefit results in that period. CVS does not expect to book its premium shortfall reserve for 2025, the spokesperson said.

CVS also recorded a restructuring charge 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.

CVS's insurance business generated $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 medical benefit ratio — a measure of total medical expenses paid compared to premiums collected — rose to 95.2% from 85.7% the previous year. A lower ratio usually indicates that the company collected more in premiums than it paid in interest, resulting in increased profitability.

CVS's Health Services segment generated revenue of $44.13 billion for the quarter, down about 6% compared to the same quarter in 2023.

This unit includes Caremark, one of the nation's largest pharmacy benefits managers. Caremark negotiates drug discounts with manufacturers on behalf of insurance plans, creates drug lists — or formularies — that insurance covers and reimburses pharmacies for prescriptions.

CVS's Health Services division processed 484.1 million pharmacy claims during the quarter, down from 579.6 million during the same period last year.

The company's pharmacy and consumer wellness division generated sales of $32.42 billion for the third quarter, up more than 12% from the same period a year earlier. This unit dispenses prescriptions at CVS's more than 9,000 retail pharmacies and also provides other pharmacy services, such as vaccinations and diagnostic tests.

CVS said the increase was driven in part by increased prescription volume. Pharmacy reimbursement pressure, new generic drug launches and decreased front-of-store volume, including a reduction in the number of stores, impacted unit sales.

In a statement, Joyner said CVS's share of the retail pharmacy market is 27.3%, an all-time high.