MW CVS says blaming drug middlemen for higher prices is 'deceptive rhetoric'

By Tomi Kilgore

CVS's stock is having its best day since 1999 after quarterly profit beat by the widest margin in more than four years

Shares of CVS Health Corp. were having their best day in 26 years on Wednesday, after the drugstore chain and healthcare-services company beat quarterly profit expectations by a wide margin, and as the under-fire pharmacy-benefit-manager business continued to improve.

Chief Executive David Joyner spent a lot of time on the post-earnings call with analysts defending PBMs, or what critics have called "drug middlemen." CVS is a PBM through its CVS Caremark business.

The stock $(CVS)$ soared 14.7% toward a four-month in morning trading, enough to pace the S&P Index's SPX gainers. It was heading for its biggest one-day gain since the record 18.2% surge on Oct. 6, 1999.

Joyner acknowledged that rising healthcare costs are a problem, for consumers, employers and the government, and need to be addressed. He said that PBMs have a "proven, unequivocal mechanism" to negotiate down the price of drugs for both consumers and payers.

"One of the most powerful forces helping to offset rising healthcare costs are PBMs like Caremark," Joyner said, according to an AlphaSense transcript. "These entities remain the only part of the drug supply chain entirely focused on lowering cost, but have erroneously been subject to deceptive rhetoric and misinformation."

The rhetoric Joyner refers to comes from both political parties. In December, then-president-elect Donald Trump blamed "horrible" middlemen for drug prices being so high, and bipartisan legislation was put forth to break up PBMs.

Rather than PBMs, Joyner said "to be clear," the reasons for rising healthcare costs are a greater use of services, the rising costs for health providers, labor shortages and "dramatic price hikes" for branded pharmaceuticals. That's why drugmakers help try to push the blame on PBMs.

"In the first three weeks of January alone, branded drug manufacturers added $21 billion of annual gross drug spend through their price items," Joyner said. "Our work is a critical counterbalance to the monopolistic tendencies of drug manufacturers."

Meanwhile, the company also reported fourth-quarter results that gave Wall Street a reason to cheer.

Net income for the quarter to Dec. 31 fell to $1.64 billion, or $1.30 a share, from $2.05 billion, or $1.58 a share, in the same period a year ago, amid continued pressure from the drop in its Medicare Advantage star rating.

Excluding nonrecurring items, adjusted earnings per share fell to $1.19 from $2.12 but was above the FactSet consensus of 91 cents. The margin of that beat - 31% - was the widest since EPS beat by 37% in the second quarter of 2020.

Total revenue grew 4.2% to $97.71 billion, above the FactSet consensus of $97.09 billion.

Revenue in the company's health-services division, which includes CVS Caremark, declined 4.3% to $47.02 billion, but exceeded the FactSet consensus of $44.45 billion. That marked the fourth straight quarter of improvement, as revenue had seen year-over-year declines of 5.9%, 8.8% and 9.7% in the previous three quarters.

Healthcare-benefits revenue jumped 23.3% to $32.96 billion, topping expectations of $32.88 billion, even as the business swung to an adjusted operating loss of $439 million from a profit of $676 million.

The medical-benefit ratio, a measure of profitability of the insurance business - lower is better - climbed to 94.8% from 88.5%, for reasons including increased utilization, the drop in the company's Medicare Advantage star ratings and increased severity of patients' conditions under the Medicaid business.

The pharmacy and consumer-wellness division booked revenue of $33.51 billion, up 7.5% from a year ago and above expectations of $33 billion, boosted by a more favorable pharmacy drug mix and increased prescription volume.

Prescriptions filled rose 3.3%, while same-store prescription volume from stores open at least a year, increased 5.9%.

Looking ahead, the company expects 2025 adjusted EPS of $5.75 to $6.00, which surrounds the current FactSet consensus of $5.86.

Mizuho analyst Ann Hynes reiterated her outperform rating, saying the results and the outlook were better than feared.

"We continue to believe 2025 is a transition year that should set the company on a multi-year path to a recovery in margins in the health insurance business," Hynes wrote in a note to clients.

CVS's stock has gained 40.5% this year, after plunging 43.2% in 2024 to suffer its worst year since 2001. In comparison, the S&P 500 has tacked on 2.7% year to date after rallying 23.3% last year.

-Tomi Kilgore

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February 12, 2025 11:12 ET (16:12 GMT)

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