The decision by CVS Caremark Corp. to halt sales of tobacco products through its CVS/pharmacy outlets by October 1 has ignited a storm of public comment and speculation about its implications for the drug chain’s financial performance and those of its competitors.

CVS Caremark, sales of tobacco products, CVS/pharmacy, drug chain, American Lung Association, American Heart Association, Nancy Brown, Tom Harkin, Walgreen, Rite Aid, National Association of Chain Drug Stores, David Larsen, Leerink Research, Mark Miller, William Blair & Co., smoking cessation, tobacco products

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Inside This Issue - News

Reaction to CVS’ decision is immediate and intense

February 17th, 2014

NEW YORK – The decision by CVS Caremark Corp. to halt sales of tobacco products through its CVS/pharmacy outlets by October 1 has ignited a storm of public comment and speculation about its implications for the drug chain’s financial performance and those of its competitors.

Understandably, public health groups were strong in their praise. “CVS Caremark is stepping forward to save lives and safeguard the public health of millions of American women, men and youth,” declared a statement from the American Lung Association, which described the move as a “forward-thinking decision to prioritize the health and well-being of current and future customers and employees.’’

The American Heart Association called the decision “an important step forward in reducing access to these deadly products” and applauded CVS’ courage in putting public health above profits. “We recognize that $2 billion in tobacco sales represents a significant sum for CVS Caremark, and that makes this decision even more admirable,” said Nancy Brown, chief executive officer of the AHA. “We call upon other tobacco retailers, in particular pharmacies that play a role in protecting the health of Americans, to follow the excellent example being set by CVS Caremark and discontinue the sales of this deadly product.”

The pressure on other drug chains to follow suit escalated significantly when eight Democratic Senators, led by Tom Harkin (D., Iowa), sent letters to the chief executive officers of Walgreen Co. and Rite Aid Corp. as well as the National Association of Chain Drug Stores. The letter urged the executives to follow CVS’ lead and stop selling tobacco products and promote smoking cessation in all stores.

Harkin was joined by fellow democratic senators Jay Rockefeller of West Virginia; Richard Durbin of Illinois; Barbara Boxer of California; Sherrod Brown of Ohio; Richard Blumenthal of Connecticut; and Jack Reed and Sheldon Whitehouse, both of Rhode Island.

On Wall Street, attention was predictably focused on the financial implications of CVS’ decision. The company was careful to include in its announcement that it will lose an estimated $2 billion in sales — less than 2% of the company’s projected sales of $132 billion — with a negative impact on fiscal 2014 earnings of 6 cents to 9 cents per share.

Management pointed out, though, that the impact does not affect its prior guidance on operating profit for the CVS/pharmacy segment or earnings per share for fiscal 2014 because it has identified “incremental opportunities” that are expected to offset the hit to profits.

“Overall, this announcement was unexpected and it may be a near-term drag on revenue and earnings, although CVS’ five-year financial projections were reaffirmed, and we believe this announcement helps CVS differentiate its commitment to improving the health of its customer,” wrote David Larsen, an analyst with Leerink Research, in a research note.

The immediate question was how Walgreen Co. and Rite Aid Corp., the other national drug chains, will react to the decision. Both companies issued carefully worded statements.

“The company has been evaluating its tobacco line for some time and will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help reduce the demand for tobacco products,” said a Walgreens spokesman.

Walgreens has announced a partnership with GlaxoSmithKline Consumer Healthcare to launch a free, Internet-based smoking cessation program called Sponsorship to Quit.

For its part, Rite Aid declared that it “offers a wide range of products, including tobacco products, which are available for purchase in accordance with federal, state and local laws,” adding that it also sells a variety of smoking cessation products while providing other resources, including its pharmacists, to people trying to stop smoking.

Several analysts see the move as an opportunity for other chains, including Walgreens, to gain front-end market share. In a research note, William Blair & Co. analyst Mark Miller predicted that Walgreens will be a primary beneficiary of the CVS decision. “If we assume that Walgreens captures 25% share of this business, it could add 5 cents to fiscal 2015 earnings per share (assuming incremental margin is the same as that assumed by CVS in its guidance today),” Miller wrote.

Even though Walgreens’ January same-store sales growth was lower than expected, the company’s share price rose on the day that both the CVS and Walgreens announcements were made. Rite Aid’s stock price also increased in the wake of the CVS move.