CVS Shares Plummet on Projected Prescription Loss

CVS Health Corp. (CVS) saw its share price plummet Tuesday morning after it lowered earnings guidance for 2016 and reported an expected loss of prescriptions in 2017 as a part of its third quarter results.

Shares fell nearly 16% ahead of market's open, but bounced back slightly, hitting $72.47 per share, a drop of 13% since yesterday's close price. CVS' results came as a shock to investors, who began a sell off before markets opened Tuesday.

"While this earnings season has taught us in healthcare that gloom and doom is around every quarter, this was a shocking outcome for CVS despite materially lowered expectations," Evercore analyst Ross Muken wrote in a note.

The retail pharmacy and pharmacy benefit manager announced that it will lower its full year guidance for 2016 from $5.81-$5.89 per share to $5.77-$5.83 per share. CVS also projected a loss of 40 million prescriptions for 2017.

"Obviously we're not happy with our outlook for 2017," CEO and president of the company, Larry Merlo said during the company's third quarter earnings call Tuesday morning.

CVS lost prescriptions to Walgreens Boots Alliance (WBA) , particularly through the military's Tricare program and Prime Therapeutics, both of which now restrict patient access to CVS.

The big surprise, though, wasn't the fact that CVS lost those prescriptions.

""What is a surprise is the profitability impact of these lost scripts," Mizuho analyst Ann Hynes wrote in a note. "Given most of the lost scripts are government, we had assumed a lower gross profit than the company average."

And, according to CVS officials, the loss caught the company off guard.

"These network changes came without giving us the chance to really give our value proposition," Merlo said during the company's call. "That caught us off guard."

What's interesting about these particular struggles is that they were ushered in by CVS with its acquisition of Caremark in 2007. This deal, which merged a retail pharmacy and a pharmacy benefit manager (which negotiates drug prices), changed the way the healthcare industry saw potential relationships between the two.

Walgreens' relationships with these pharmacy benefit managers, though, are what caught CVS off guard this quarter.

Walgreens shares also fell Tuesday morning, hitting $79.25 per share, down 2.7% since market's open. Both companies were trading at high volume Tuesday.

Despite dismal share prices, CVS actually reported earnings that beat the street's consensus. The company raked in $1.64 per share, compared to $1.57 per share in consensus estimates.

Revenues were also slightly worse than expected - CVS brought in $44.62 billion, compared to expected $45.31 billion.

These results likely change the likelihood that CVS could do more deals in 2017. The company was previously seen as a potential buyer for some of the Rite Aid (RAD) stores divested in Walgreens' acquisition of the company.

CVS, though, did not provide much guidance on M&A activity during its call.

CVS has a market cap of $77.32 billion.

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