CVS Caremark Corp. posted sharp revenue and same-store sales gains for the first quarter as its retail pharmacy business reaped the benefits of the contract impasse between rivals Walgreen Co. and Express Scripts Inc.

CVS Caremark, first quarter, revenue, same-store sales, net income, adjusted earnings, adjusted EPS, Larry Merlo, retail pharmacy, PBM, pharmacy benefit management, retail pharmacy business, pharmacy same-store sales, Walgreens, Express Scripts, comparable pharmacy sales, Russell Redman, Maintenance Choice, PBM selling season, generic drug, generic dispensing rate, income from continuing operations, Mark Miller, William Blair & Co.

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Retail pharmacy drives 1Q gains for CVS Caremark

May 2nd, 2012

WOONSOCKET, R.I. – CVS Caremark Corp. posted sharp revenue and same-store sales gains for the first quarter as its retail pharmacy business reaped the benefits of the contract impasse between rivals Walgreen Co. and Express Scripts Inc.

Adjusted earnings per share also came in above the consensus forecast of Wall Street analysts.

CVS said Wednesday that for the first quarter ended March 31, total revenue swelled 19.9% to $30.8 billion from $25.7 billion a year earlier.

Sales in the retail pharmacy segment climbed 9.9% to $16 billion in the quarter, with same-store sales surging 8.4% year over year. Pharmacy same-store sales grew 9.8%, reflecting the positive impacts of what CVS called "a significant benefit" from the Walgreens-Express Scripts dispute as well as a calendar shift that added another weekday versus a year ago and the extra day from leap year. Comparable pharmacy sales were negatively impacted by about 305 basis points from generic drug introductions plus the weak flu season, partially offset by the early onset of the allergy season, CVS said.

Front-end same-store sales rose 5.3% in the first quarter, lifted by about 120 basis points from the extra day due to leap year.

In CVS Caremark's pharmacy benefit management (PBM) business, first-quarter revenue jumped 32.3% to $18.3 billion year over year. The company said the gain stemmed mainly from new activity resulting from its acquisition of the Medicare prescription drug plan of Universal American Corp. last year, new client starts from its 2011 PBM selling season and drug cost inflation.

CVS Caremark CEO Larry Merlo credited the CVS/pharmacy retail team's efforts in responding to the Walgreens-Express Scripts situation.

Also in the first quarter, the generic dispensing rate increased by 290 basis points to 78.1% in the retail pharmacy segment and by 270 basis points to 76.5% in the PBM segment, CVS added.

On the earnings side, income from continuing operations attributable to CVS Caremark in the first quarter came in at $777 million, or 65 cents per share, up from $710 million, or 57 cents per share, a year earlier. Analysts, on average, projected adjusted earnings per share (EPS) of 63 cents for the quarter, with the forecast ranging from a low of 62 cents to a high of 68 cents, according to Thomson Financial.

CVS noted that adjusted EPS excludes $118 million and $106 million of intangible asset amortization from acquisition activity in 2012 and 2011 first quarters. Net earnings per diluted share from continuing operations attributable to CVS Caremark was 59 cents for the 2012 quarter, compared with 52 cents in the 2011 period.

The earnings gain was fueled mainly by an 18.4% boost in operating profit in the retail pharmacy business, CVS said, pointing to the benefit from the Walgreens-Express Scripts situation, the extra day from leap year and further growth in its Maintenance Choice program, which allows mail-order customers to pick up prescriptions in CVS/pharmacy stores. Also, as of Jan. 1, the company changed its methods of accounting for prescription drug inventories in the retail pharmacy segment, which led to an after-tax benefit of about $19 million, or 1 cent per share, in the first quarter.

"We posted an outstanding first quarter with strong results across the board," Larry Merlo, president and chief executive officer of CVS Caremark, said in a statement. "Results in both our retail and PBM segments came in at the high end of our guidance, while EPS exceeded expectations. We also generated $2.4 billion in free cash during the quarter, which places us comfortably on track to achieve our goal for the year."

Merlo also cited the company's response to the Walgreens-Express Scripts contract stand-off. "Our retail team has done an outstanding job capitalizing on the unprecedented opportunity for share gains afforded to us by the impasse between two of our industry peers," he stated. "At the same time, while it is still early in the 2013 PBM selling season, we're optimistic about the opportunities and continue to feel very good about our position in the marketplace. With our stable business and unmatched breadth of capabilities, we are very well-positioned for success in the 2013 and 2014 selling seasons."

During the first quarter, CVS opened 32 new retail drug stores, relocated 40 stores and closed seven drug stores. As of March 31, the drug chain operated 7,352 retail drug stores overall.

The strong first-quarter performance led CVS Caremark to raise its earnings guidance for 2012. Adjusted EPS for the full year, including a benefit of 3 cents to 4 cents per share in the second quarter from the Walgreens-Express Scripts impasse, is now pegged at $3.23 to $3.33. GAAP diluted EPS from continuing operations are projected at $3.01 to $3.11.

Analysts forecast CVS' adjusted EPS for 2012 at $3.27 on average, with projections running from a low of $3.23 to a high of $3.33.

CVS noted that its earnings outlook doesn't project any benefit from the stalemate between Walgreens and Express Scripts beyond the second quarter.

"Stronger‐than‐expected first‐quarter results and higher 2012 EPS guidance could be one favorable data point among many, as the company appears well-positioned for further upside moving through the year," analyst Mark Miller of William Blair & Co. wrote in a research note Wednesday on CVS Caremark's quarterly results.

Miller noted that his firm had raised its 2012 EPS forecast for CVS in late July and has since made positive estimate revisions. "A significant part of the upside is due to an even larger benefit than we anticipated from the contract impasse between Express Scripts and Walgreens," he stated. "We believe CVS remains exceptionally well-positioned and is responding brilliantly."

With the robust first-quarter report, William Blair raised its 2012 EPS estimate for CVS by 5 cents to $3.37. "Our 2012 EPS forecast assumes a 13-cent EPS lift from pickup of Walgreens pharmacy customers," Miller said. "[CVS] guidance assumes a 6 cents to 7 cents benefit in the first half of 2012 only."

*Editor's Note: Article updated with analyst comment.