CVS Stock Gets a Boost as Final Judicial Review on Aetna Merger Begins

June 4, 2019 by Paul Ausick

Shares of CVS Health Corp. (NYSE: CVS) popped nearly 4% Tuesday morning following the company’s announced strategy to drive growth now that the merger with Aetna is (almost) in the books. At its Investor Day presentation in New York Tuesday morning, the company also reaffirmed its prior guidance for the full fiscal year.

CVS expects total revenues of $251.2 billion to $254.4 billion and adjusted operating income of $15.0 to $15.2 billion. Diluted earnings per share (EPS) is forecast at $4.90 to $5.05, and adjusted EPS is forecast at $6.75 to $6.90. The company said it will have $4.2 billion to $4.6 billion in cash available to pay down debt. That’s a start on the $78 billion (including assumed debt) it paid for Aetna. CVS issued $45 billion in new debt in connection with the transaction.

A week ago, Merrill Lynch analyst put long-term EPS growth estimates of 3.5%, 7.0% and 11.0% on the stock under three scenarios: low-growth, middle and high-growth, respectively. The price target was $75, more than 40% above the stock’s $52.72 closing price on May 28.

Maybe by coincidence or maybe by planning, CVS held its Investor Day on the same day that the company begins a new three-day hearing in U.S. District Court in Washington, D.C., to gather testimony from the American Medical Association (AMA), the AIDS Healthcare Foundation, U.S. PIRG and others opposing the settlement CVS reached last November with the Department of Justice to allow the merger to go through.

The unusual review is authorized by the Tunney Act, which requires federal courts to review Justice Department consent decrees in antitrust cases to ensure that the agreed settlement is in the public interest. The act first passed in 1974 and subsequently amended in 2004 is intended to give the federal judiciary more effective oversight of antitrust consent decrees. Most famously, Federal Judge Harold Greene refused to accept the department’s 1982 consent decree related to the breakup of AT&T.

The AMA, for example, has argued that CVS’s agreement to sell its Medicare Part D (prescription drug coverage) to WellCare does not go far enough to prevent potential harm to consumers. According to a report at HealthcareDive, the AMA has determined that the merger “would likely injure consumers by raising prices, lowering quality, reducing choice and stifling innovation in five markets: PDP [prescription drug plan], PBM [pharmacy benefits management] services, health insurance, retail pharmacy and specialty pharmacy.”

CVS is arguing that the judge’s limited review scope does not permit him to raise issues beyond those address in the Justice Department’s review.

There are other issues as well, but the merger between CVS and Aetna requires the signature of the judge in this case. While the deal is expected to be approved, there is still a chance that the judge could delay it.

For the present, however, CVS shares enjoyed a bump of around 4.1% to $55.59, in a 52-week range of $51.72 to $82.15. The consensus price target on the shares is $68.96.


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