CVS announces record second-quarter earnings

Drug Store News (Online)
August 2, 2007
By Antoinette Alexander

WOONSOCKET, R.I. - In typical CVS fashion, the pharmacy retailer posted record revenues and earnings for the second quarter—a quarter that was undoubtedly on the radar screen of industry observers since it marked the first full quarter with Caremark. ”Our second-quarter performance once again demonstrates that we certainly kept our eye on the ball and, better yet, we kept our eye on our customers,” Tom Ryan, president and chief executive officer of CVS, told analysts during a conference call earlier this month to discuss results. ”Our results are very healthy both in our retail and our PBM business units.” On March 22, CVS merged with pharmacy benefit manager Caremark, creating a $75 billion PBM powerhouse.

While there was a lot of ground to cover during the call with analysts, the recent Caremark merger was certainly top of mind as many, including Ryan, see the deal as an industry ”game-changer,” and some believe that it could serve as a benchmark for additional mergers within the industry. ”CVS’ second-quarter operating results, the first full period with Caremark, were strong in both the retail and PBM segments giving us additional confidence in the strategic wisdom of the merger and the EPS outlook in 2008 and beyond,” stated Goldman Sachs analyst John Heinbockel in a research note.

CVS has ”virtually” completed its integration of Caremark, which initially focused on three areas: the integration of PharmaCare into Caremark, the integration of Caremark into CVS at the corporate level and the development of its new Go-To-Market strategy with new products and services. ”I’m very pleased to say that the integration is virtually completed with respect to the immediate changes required,” said Ryan, who noted that the company has held three client focus meetings since the merger and has received ”positive” feedback. Furthermore, existing and prospective clients have said that they do not see a channel conflict with the CVS/Caremark model.

With respect to its new Go-To-Market strategy, the company has put in place a development team to identify a number of opportunities for products and services in 2008. For competitive reasons, Ryan declined to disclose too much detail but did say that some examples of product and service offerings include flexible fulfillment, improved generic and formulary compliance at both mail and retail, in-store pick up of mail order pharmacy and unique OTC opportunities. ”In the medium to longer-term, we will begin to create a single view of the patient from a broad-based health management program perspective,” said Ryan. ”These programs will result in the highest quality health and pharmacy services that will continue to lower payor’s overall health care costs. These are breakthrough programs, industry changing programs.” Some examples of such programs include unique disease management utilizing Caremark products and call centers, along with CVS pharmacists and MinuteClinic nurse practitioners. Looking ahead, CVS provided several positive revelations as it offered an update on the 2008 PBM selling season.

”Aside from the [Federal Employee Program] and [the state of New York] contracts, very little additional business has been lost,” stated Heinbockel. ”In addition, more than $1 billion in new contracts has been won with the potential for another $1 billion to be brought on board before the season ends. The full-year retention rate should be 90 percent, in line with the historical average.” Furthermore, the company now expects that merger synergies will significantly exceed $500 million in 2008. Ryan also talked about MinuteClinic, its subsidiary that operates in-store health clinics. ”MinuteClinic, as you know, is another fast growing piece of our business. In fact, our clinic count increased 10 percent on July 4th alone,” said Ryan.

The company currently operates 230 clinics in 20 states, of which 210 are located inside CVS stores. By year-end, the company expects to operate about 450 clinics across 25 states. ”MinuteClinic will be a part of our strategy as we expand our offerings on the PBM side of the business, said Ryan. With respect to the 701 Sav-on/Osco stores acquired on June 2, 2006 from Albertsons, the stores had a slightly dilutive impact on overall comps in July, but Ryan stressed that the stores are ”ahead of plan on both margins and cash flow.” ”The reduction in front-end sales was planned as we eliminated the low-margin, low-return categories [in these stores]. As a result, front store margins are improving significantly in these stores and are near core CVS levels. On the pharmacy side, this wasn’t a turnaround situation like some other acquisitions,” added Ryan. ”… All trends have been moving in the right direction each month throughout 2007. I’m confident that the former Sav-on/Osco stores will be a sales and margin-driver in the second half of 2007 and beyond.”

For the quarter ended June 30, net earnings increased 114.1 percent to $723.6 million, or 47 cents per share, compared with net earnings of $337.9 million, or 40 cents per share, in the year-ago period. CVS estimates merger and integration costs associated with the Caremark merger negatively impacted diluted earnings per share by 1 cent during the second quarter. Revenues increased $10.1 billion to $20.7 billion, up from $10.6 billion during the year-ago period. Same-store sales for the quarter (which do not include Sav-on/Osco stores) rose 5.7 percent. Pharmacy same-store sales also rose 5.7 percent, while front-end same-store sales increased 5.9 percent. ”These positives outweigh third quarter EPS guidance of 42 cents to 44 cents, below the 45 cents consensus,” stated Heinbockel. ”We note that the company has a tendency to guide conservatively, as evidenced by second quarter results, which exceeded the street by 1 cent.”