Boosted by a contract with a large pharmacy benefit management client, CVS Caremark Corp. saw healthy sales gains in its 2011 first quarter, with earnings topping analysts' forecast.

CVS Caremark, first quarter, 2011 first quarter, pharmacy services, pharmacy benefit management, PBM, revenue, same-store sales, pharmacy, front end, drug store, retail drug store, Larry Merlo, Aetna, Universal American, Maintenance Choice, Russell Redman, retail pharmacy, prescriptions, Helene Wolk, Sanford Bernstein & Co.

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1Q report: CVS Caremark 'off to good start' in 2011

May 5th, 2011

WOONSOCKET, R.I. – Boosted by a contract with a large pharmacy benefit management client, CVS Caremark Corp. saw healthy sales gains in its 2011 first quarter, with earnings topping analysts' forecast.

The company said Thursday that for the first quarter ended March 31, overall revenue climbed 8.9% to $25.9 billion from $23.8 billion a year earlier.

While gains in retail pharmacy revenue and same-store sales exceeded those in the previous quarter, a rebound in the PBM business lifted first-quarter results. CVS Caremark said pharmacy services segment revenue surged 18.4% to $14 billion, driven mainly by the addition of its long-term contract with Aetna.

Retail network claims processed in the first quarter increased 19.5% to 157.7 million, and mail choice claims processed during the rose about 13% to 17.5 million — both driven by the Aetna contract, according to CVS Caremark. A rise in Medicare Part D prescription drug claims due to increases in covered lives also fueled the gain in retail network claims.

On the retail pharmacy side, revenue edged up 4.4% to $14.6 billion in the 2011 first quarter, while same-store sales increased 2.6%.

CVS Caremark said pharmacy same-store sales were up 3.7%, reflecting a strong flu season and a 170-basis-point net positive impact from its Maintenance Choice program, which gives mail-order customers the option to fill prescriptions at a CVS store. Recent generic drug introductions negative impactly pharmacy same-store sales by approximately 260 basis points, the company added.

In the front end, same-store sales inched up 0.4% in the first quarter, including negative impacts of 45 basis points from the shift of sales related to the Easter holiday into the second quarter and 65 basis points due to lost sales during the grand reopening of Longs Drug stores in the prior year, CVS Caremark said.

Meanwhile, on the earnings front, income from continuing operations attributable to CVS Caremark in the 2011 first quarter fell 7.6% to $714 million from $773 million a year earlier. The company said the decline stemmed from lower gross profit in the PBM segment, which was mainly due to pricing compression related to contract renewals, notably a large government contract that took effect in the 2010 third quarter.

Adjusted earnings per share (EPS) from continuing operations attributable to CVS Caremark came in at 57 cents for the first quarter, down from 60 cents a year ago. Still, the result for the 2011 first quarter beat the average analyst EPS estimate of 55 cents, with projections ranging from a low of 54 cents to a high of 57 cents, according to Thomson Financial. CVS Caremark noted that adjusted EPS in the quarter excludes $106 million of intangible asset amortization from acquisition activity. 

"2011 is off to a good start, with results slightly above guidance for both our retail and PBM businesses," Larry Merlo, president and chief executive officer of CVS Caremark. "We also generated $1.6 billion in free cash this quarter, more than double the amount we generated in last year's first quarter. Our retail business continues to grow and gain share, and our new store clustering initiatives are yielding promising results." 

Merlo also gave a positive outlook for the pharmacy services segment. "The PBM's 2012 selling season is also off to a good start, and adoption of our integrated offerings is growing," he stated. "The Aetna implementation and PBM streamlining initiatives are both proceeding well and on schedule. I remain confident in our ability to execute our operating plans and improve the performance of our PBM for 2012 and beyond."

CVS Caremark added that the closure of the acquisition of Universal American Corp. Medicare Part D business is expected to be accretive by 8 cents to adjusted earnings per diluted share for the rest of the year.

During the first quarter, the company opened 57 new retail drug stores, closed 13 and relocated 49. As of March 31, it operated 7,226 retail drug stores.

For full-year 2011, CVS Caremark's management reaffirmed its earlier guidance for adjusted EPS from continuing operations to range from $2.72 to $2.82. The average analyst estimate is for earnings of $2.77 per share, with the forecast running from a low of $2.69 to a high of $2.89 cents, Thomson Financial reported.

In a research note on CVS Caremark's first quarter, Sanford Bernstein & Co. analyst Helene Wolk commented, "We view these results as largely in line with our expectations, with solid retail performance helping to offset weak PBM results."

Although CVS Caremark beat analysts' EPS forecast in the quarter, the company reaffirmed its previous guidance for the full year, which at the midpoint matches analysts' consensus projection of $2.77, "which may be slightly disappointing," Wolk stated.

"We believe expectations were that CVS Caremark full-year 2011 guidance is conservative, allowing new leadership room to beat," she explained. "We continue to believe the focus is on 2012 and improved performance by the PBM, and while we expect improved EPS growth for CVS Caremark in 2012 on better PBM performance, we remain cautious given heavy renewals and growing expectations for the stock."