CVS Health Corp. will defend its acquisition of insurer Aetna Inc. in two high-profile settings Tuesday, seeking to sell skeptical investors and a federal judge on the nearly $70 billion deal.
CVS lawyers will be in a Washington, D.C., federal court for the start of an unusual three-day proceeding in which U.S. District Judge Richard Leon is considering whether the Justice Department adequately protected competition when it approved the deal last year.
In New York, the Woonsocket, R.I.-based health-care company will hold an investor day to discuss its outlook, with analysts looking for evidence that CVS can improve its financial performance amid challenges to its core businesses.
The deal, reached in November, combined CVS’s sprawling network of pharmacies and pharmacy-benefit-management business with Aetna’s health-plan assets. Coming together, the companies had sketched a vision of lowered health-care costs and improved care for consumers.
A CVS spokesman declined to comment on the investor day or the court hearing.
The Justice Department’s antitrust division approved the merger after the companies agreed to sell off Aetna’s Medicare Part D drug business to WellCare Health Plans Inc. The department said the divestiture was needed because Aetna and CVS had been important competitors in selling Medicare drug plans to seniors in 22 states.
Groups like the American Medical Association said the divestiture didn’t do enough to protect competition for prescription-drug plans, and they argued the department didn’t address broader concerns about health-care industry consolidation.
The criticism caught the attention of Judge Leon, who is considering whether to approve the settlement between the companies and the Justice Department. Judges typically give the nod to such settlements as a matter of routine — and without extended consideration — but Judge Leon made clear he has concerns about the deal, and he took the unprecedented move of scheduling three days of hearings with live witness testimony.
The judge insists that the proceedings aren’t a mini-trial of a merger that the government isn’t seeking to block, saying the testimony would help him determine whether the settlement is in the public interest.
Judge Leon, a George W. Bush appointee, said he would hear from six witnesses: three critical of the merger and three selected by CVS to testify in favor of the deal, including executives from CVS and Aetna.
For its part, the Justice Department said in a May 24 filing that Judge Leon’s rules for the proceedings were unfair because the company could neither present its own witnesses nor cross-examine those critical of the settlement. Judge Leon said his procedures were appropriate, rejecting what he described as the department’s “11th-hour request” to change them.
It isn’t clear what would happen next should the judge reject the Justice Department settlement allowing the merger. Meantime, CVS is moving forward as if the court proceedings won’t impact its business. The company already has sold the assets to WellCare that the Justice Department required, and it has contractual obligations to provide support to WellCare through 2019, regardless of whether the court formally approves the agreement.
CVS faces challenges that have affected its rivals as well, including a squeeze on pharmacy margins and government scrutiny of the traditional pharmacy-benefits business model, particularly rebates paid by drugmakers. Health insurers’ shares have also been dragged down by some Democrats’ support for universal government health coverage. There were “pressures on all the legacy businesses that accelerated heading into this year,” said Matthew Borsch, an analyst with BMO Capital Markets.
In February, CVS gave a downbeat earnings projection for 2019, pushing its shares down sharply and leading investors to press for more detail about the company’s growth plans. The shares have remained stagnant, despite stronger-than-expected first-quarter results, and CVS has promised a fuller picture of its future in the Tuesday session.
A JPMorgan Chase & Co. poll of investors found their highest priorities for the CVS investor day were long-term financial guidance and a clear strategic vision. Among respondents who didn’t own CVS shares, a third said the session might convince them to buy. “Their credibility can be restored based on their ability to lay out the strategy and numbers,” said Lisa Gill, a JPMorgan analyst.
Analysts polled by Refinitiv were projecting earnings per share of $5.02 in 2019, $5.66 in 2020 and $6.67 in 2021. On an adjusted basis, they predicted earnings per share of $6.85 for 2019, a 5.4% increase to $7.22 for next year and growth of 8% to $7.80 for 2021.
“It’s really about operating earnings and their ability to grow that,” said Kevin Caliendo, an analyst with UBS.
Investors are also looking for specifics around CVS’s plans to build up its health-care role in the wake of the merger, say analysts, including through new health hub stores designed to offer a broader range of services, many aimed at those with chronic illnesses. Problem areas such as the company’s troubled Omnicare long-term-care pharmacy business are also likely to draw questions, they said.
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