Revenue rose by double digits in the second quarter at CVS Caremark Corp., despite only slight gains in overall sales and same-store sales by the retail pharmacy segment.

CVS Caremark, second quarter, revenue, earnings, same-store sales, retail pharmacy, retail drug store sales, pharmacy benefit management, PBM, adjusted EPS, Larry Merlo, Maintenance Choice, front-end, Aetna, Universal American, Medicare prescription drug business, prescription drug business, income from continuing operations, PBM profit, Medicare Part D business, earnings guidance, Russell Redman, Helene Wolk, Sanford Bernstein & Co.

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CVS sees modest retail drug store sales gain in 2Q

August 4th, 2011

WOONSOCKET, R.I. – Revenue rose by double digits in the second quarter at CVS Caremark Corp., despite only slight gains in overall sales and same-store sales by the retail pharmacy segment.

On the earnings front, CVS Caremark saw a dip in net income from continuing operations in the quarter. Still, it beat Wall Street's projection for adjusted earnings per share (EPS) by a penny.

The company said Thursday that for the second quarter ended June 30, total revenue climbed 10.9% to $26.63 billion from $24.01 billion a year earlier.

Retail drug store sales increased 3.6% to $14.8 billion, with same-store sales up 2% year over year. In the pharmacy, same-store sales rose 2.6%, reflecting a net positive impact of 160 basis points from Maintenance Choice program (which enables mail-order customers to pick up prescriptions at CVS/pharmacy stores) and a negative impact of 170 basis points from generic drug introductions. Front-end same-store sales inched up 0.8%, including a positive impact of 45 basis points from the shift of sales related to the Easter holiday into the second quarter, according to CVS Caremark.

In the pharmacy benefit management (PBM) segment, revenue swelled 23.2% to $14.6 billion in the second quarter. CVS Caremark said the gain stemmed mainly from the addition of a long-term contract with Aetna Inc. and new activity from its acquisition of the Medicare prescription drug business of Universal American Corp. Pharmacy network claims in the quarter surged 35.6% and Mail Choice claims climbed 11.3%.

Meanwhile, income from continuing operations attributable to CVS Caremark in the second quarter decreased to $817 million from $822 million a year ago. The company attributed the decline to lower gross profit in the PBM business stemming mainly from pricing pressure related to contract renewals and the renewal of a large government contract that took effect during the 2010 third quarter. That negative impact, however, was partially offset by an improvement in the effective income tax rate during the second quarter, the company said.

Adjusted EPS from continuing operations attributable to CVS Caremark in the 2011 second quarter came in at 65 cents, the same as a year earlier. The average analyst estimate was for EPS of 64 cents, ranging from a low of 63 cents to a high of 70 cents, according to Thomson Financial.

CVS Caremark noted that adjusted EPS excludes $114 million and $106 million of intangible asset amortization from acquisition activity. GAAP earnings per diluted share from continuing operations attributable to CVS Caremark came in at 60 cents in the 2011 second quarter, the same as a year ago.

"I'm very pleased with our second-quarter results, which were at the high end of our guidance," Larry Merlo, president and chief executive officer of CVS Caremark, said in a statement. "While our pharmacy services business performed as expected, the retail business exceeded our goals due to solid expense control and higher-than-expected generic utilization. At the same time, we generated more than $800 million in free cash in the quarter, bringing our year-to-date free cash flow to $2.4 billion."

During the second quarter, CVS opened 41 new retail drug stores and closed one, operating a total of 7,266 retail drug stores as of June 30.

Merlo added that CVS Caremark has "made terrific progress" on its plan to spur PBM profit growth.

"Our PBM has had an outstanding selling season to date, with excellent retention of existing business as well as a number of significant new business wins," he stated. "We've seen increased adoption of our differentiated product offerings, such as Maintenance Choice and Pharmacy Advisor, clearly demonstrating that our model is resonating with payers. Furthermore, we have made good progress on the integration of the Universal American Medicare Part D business, the implementation of the Aetna contract and the streamlining initiatives to generate significant efficiencies within our PBM. Combined, these efforts should generate healthy performance in our PBM in the years ahead."

In a quick take on CVS Caremark's second-quarter performance, before a conference call with management to discuss the results, analyst Helene Wolk of Sanford Bernstein & Co. pointed to the pharmacy company's 1 cent beat over Wall Street's earnings forecast but added that its same-store results "appear light."

"CVS reported second-quarter 2011 adjusted EPS of 65 cents, beating the consensus of 64 cents and our 63-cents estimate, with stable trends, meaning solid retail performance and continued weakness in PBM margins, as expected," Wolk wrote in her analysis. "Retail delivered 13% operating profit growth year over year, though same-store sales growth of 2% disappointed (below consensus at 3.1%), with strong operating leverage contributing to margin expansion."

Looking ahead, CVS Caremark trimmed its earnings guidance range for the full year. The company now projects adjusted EPS from continuing operations at $2.75 to $2.81, compared with its previous forecast of $2.72 to $2.82.

Before the company pruned its earnings outlook, analysts on average predicted full-year EPS at $2.78, with projections running from a low of $2.74 to a high of $2.83, according to Thomson Financial.