(Reuters) - CVS Health Corp CVS.N gave a disappointing profit forecast for 2016, hurt by costs related to the acquisition of Target Corp’s pharmacies and as its own pharmacy benefits management (PBM) business expands in low-margin Medicare and Medicaid plans.
The drugstore operator’s profit missed analysts’ estimates for the first time in six quarters, as its $10-billion Omnicare acquisition failed to offset pressure from lower reimbursement rates and new low-margin generic drugs.
CVS shares were down 4.6 percent at $98.98 in heavy trading on Friday, among the top decliners on the S&P 500 .SPX. They fell as much as 7 percent earlier.
The weak forecast from CVS, the No.2 U.S. drugstore chain by store count, comes in the same week that larger rival Walgreens Boots Alliance Inc WBA.O said it would buy No.3 Rite Aid Corp RAD.N for $9.4 billion.
CVS forecast 2016 adjusted earnings of $5.68-$5.88 per share, including a $4 billion stock buyback plan and a 6 cents per share impact related to the acquisition of Target’s TGT.N pharmacies in June.
Analysts on average were expecting a profit of $6.02 per share, according to Thomson Reuters I/B/E/S.
“While no one can complain about a $100 billion behemoth growing EPS 10-14 percent in a challenging environment, expects were clearly somewhat higher given the M&A activity in 2015,” Evercore ISI analyst Ross Muken wrote in a note.
CVS said sales at its drugstores were hurt in the third quarter by the introduction of low-margin generic drugs, lower reimbursement rates and its move to stop selling tobacco products last year.
“Reimbursement pressure has not changed but ... Medicare and Medicaid are big areas of growth in this (PBM) business. And they carry a lower margin rate,” Chief Executive Larry Merlo said on a conference call.
Rising generic drug prices are hurting drugstore operators as insurers and PBMs have been slow in raising reimbursement rates for those drugs.
Margins in CVS’s PBM business, which accounted for 66 percent of net revenue in the quarter ended Sept. 30, fell 45 basis points.
Net income attributable to CVS rose 31.4 percent to $1.25 billion, or $1.11 per share. Excluding items, it earned $1.28 per share. Net revenue rose 10.3 percent to $38.64 billion.
Analysts had expected earnings of $1.29 per share on revenue of $37.89 billion.
About 9.2 million CVS shares were traded by 11 a.m ET, with the stock’ turnover topping $900 million, the third highest among S&P 500 companies.
Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Savio D'Souza