CVS Caremark Corp. executives told those attending its annual Analyst Day meeting that the company has a bright future, despite warning that earnings and sales growth next year could fall below long-term goals.

CVS Caremark, Analyst Day, Tom Ryan, Larry Merlo, Dave Denton, PBM, pharmacy benefit management, PBM business, CVS, Richard Monks, pharmacy, drug store, MinuteClinic, health care, CustomeRx Savings Initiative, CSI, Pharmacy Advisor, ExtraCare Beauty Club, Just the Basics, Helene Wolk, Sanford Bernstein & Co., Mark Miller, William Blair & Co., Russell Redman

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CVS Caremark looks ahead to growth

October 15th, 2010

NEW YORK – CVS Caremark Corp. executives told those attending its annual Analyst Day meeting that the company has a bright future, despite warning that earnings and sales growth next year could fall below long-term goals.

The outlook largely confirmed the expectations of financial analysts, who seemed more encouraged by CVS Caremark's potential upside in the coming years but expressed added caution about nearer-term performance.

"We offer the most convenient access point for health care," chairman and chief executive officer Tom Ryan said. "This is an opportunity for us, and we think it is a huge one."

To fully maximize that advantage, however, CVS admits it will have to make significant investments in portions of its operations, including streamlining its pharmacy benefit management business. CVS has said that from now until 2015 it expects to increase its earnings per share by 10% to 15% a year, excluding onetime items, and to grow its same-store sales by 3% to 5% a year.

However, CVS chief financial officer Dave Denton told analysts and investors that 2011 earnings growth would be below the five-year plan's goals because of expenses the company faces to make its PBM business more efficient and because of the entry of fewer new generic drugs. Although generics cost consumers less, he explained, they provide retail pharmacies with higher margins than branded drugs.

CVS also said that while its same-store sales increased 2.5% in the third quarter — below what some analysts had estimated — the increase was higher than other drug chains saw during the period.

The continued sluggish U.S. economy is also impacting CVS' business, executives said, causing more consumers to reduce their spending on prescription drugs and general merchandise.

All of these drawbacks, Ryan stressed, are short-term problems. In the long run, he said, CVS will only get better.

"We clearly operate in a vibrant industry, and we are going to capitalize on the long-term growth opportunities that the demographics and changing health care system offer us," he said.

For instance, he noted, the advent of health care reform will bring more patients into pharmacies. That could result in CVS filling as many as 2 million more prescriptions a year. On top of that, Ryan and the other CVS executives at the meeting said the country's aging population and the growing number of Americans with chronic conditions will also swell the ranks of people who rely on prescription drugs.

CVS, they stressed, is well-prepared to meet the needs of the nation's changing health care system.

"We recognized a long time ago that the role of the pharmacist would evolve from a dispenser of products to a provider of services," president and chief operating officer Larry Merlo told the analysts and investors.

As result, CVS has been slowly revamping the way it treats patients, implementing a host of novel programs designed to improve outcomes as well as lower costs.

The company's MinuteClinic operation, for instance, is expected to increase in size to nearly, 1,000 walk-in health centers by 2015, Merlo said. In its pharmacies, the company’s CustomeRx Savings Initiative — dubbed CSI — is aimed at improving patients' lives by advocating for lower-cost treatment options.

More than 18,000 patients are counseled every week on CSI options, Merlo said, with nearly half accepting the offers to switch to a lower-price drug. In addition, 65% of prescribers given the choice to switch their patients to the lower-price alternative do so.

These pharmacy interventions, Merlo noted, will save patients about $50 million in out-of-pocket expenses this year.

In January, the company plans to launch a program it calls Pharmacy Advisor. Merlo described Pharmacy Advisor as "a multichannel program that leverages our clinical intelligence and behavioral insights to identify interventions for members and deliver them at the right time in the right channel." The bottom line, he pointed out, is that the initiative will lead to better patient care and a reduction in health care costs.

Merlo noted that there are a wide variety of other efforts under way to enhance the productivity and effective of CVS' pharmacy operation, with all of these initiatives designed to provide lower costs to payers and patients while helping to boost CVS' bottom line and increase the role it plays in the country's burgeoning health care system.

"We continue to see long-term upside to CVS Caremark shares based on improving performance in the PBM segment and increasing confidence in the integrated model," Sanford Bernstein & Co. analyst Helene Wolk wrote in a research note on the analyst meeting.

"Analyst Day provided a positive update on the PBM turnaround, with a successful 2011 selling season as shown by better-than-expected client retention and improved marketing leading to modest new business wins," Wolk explained. "That said, we expected management to reinvest in future growth, and management confirmed its plans to invest $200 million in PBM infrastructure in 2011-12. While we expect the PBM performance to improve in 2011, we believe retail estimates are challenging in 2011. We forecast same-store sales to significantly improve (from 2.3% in 2010 to 3.7% in 2011) as we lap the flu and Prevacid headwinds, project market growth to accelerate modestly and see easier compares ahead."

Similarly, analyst Mark Miller of William Blair & Co. stated in a research report that the strong promise of CVS Caremark's drug store/PBM business model "is still more future potential than current reality."

The analyst meeting "highlighted the significant opportunities for CVS Caremark to improve prescription adherence, close gaps in care and lower medical cost," Miller wrote. "But the disappointing 2011 preliminary earnings-per-share view suggests the company has yet to fully turn the corner with the integrated model."

Miller said CVS Caremark's net new PBM client wins and retention are encouraging, as is the company's long-term growth projections for earnings per share. Still, he noted, the shorter-term has more question marks.

"While the retail operations have an outlook for 'continued strong growth' in 2011, it appears the PBM business may achieve limited underlying profit growth," Miller commented.

On the retail side, he cited developments discussed at the analyst meeting such as a new private-label brand dubbed Just the Basics, due to launch with 100 items in February; strong early results with the new urban store prototype; pilots of a beauty mini-format; and a new loyalty offering called ExtraCare Beauty Club, slated to come out in January.

Editor's Note: Russell Redman contributed to this story.