At its Analyst Day event in New York, CVS Caremark Corp. projected robust earnings and revenue growth for fiscal 2012 as executives cited health care trends that bode well for the company's integrated business model, which combines a retail drug chain and pharmacy benefit management unit.

CVS Caremark, Analyst Day, Dave Denton, Larry Merlo, earnings, revenue, profit guidance, earnings guidance, fiscal 2012, fiscal 2011, retail pharmacy, drug chain, pharmacy benefit management PBM, health care, Maintenance Choice 2.0, Pharmacy Advisor 3.0, medication adherence, MinuteClinic, Russell Redman, generic drugs, William Blair & Co., Mark Miller

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CVS executives tout 'unique suite of assets'

December 20th, 2011

NEW YORK – At its Analyst Day event in New York, CVS Caremark Corp. projected robust earnings and revenue growth for fiscal 2012 as executives cited health care trends that bode well for the company's integrated business model, which combines a retail drug chain and pharmacy benefit management unit.

The forecast stands to further hoist CVS' stock price in the wake of a strong third-quarter performance — notably by the PBM — reported in November. Financial analysts were encouraged by the quarterly gains yet noted at the time that the company had held back on giving 2012 profit guidance until Analyst Day.

Chief financial officer Dave Denton said at the event Tuesday that for 2012, CVS expects adjusted diluted earnings per share (EPS) from continuing operations of $3.15 to $3.25, up 13% to 16.5% from the midpoint of the company's 2011 earnings guidance.

That's in line with the average analyst EPS estimate of $3.21 for 2012, with the projections ranging from a low of $3.12 to a high of $3.28, according to Thomson Financial.

Also for fiscal 2012, CVS forecast operating profit increases of 7% to 9% for its retail pharmacy unit and 11% to 15% for its PBM business. The company expects free cash flow to climb to $4.3 billion to $4.6 billion in 2012, compared with $4 billion to $4.2 billion estimated for 2011.

CVS noted that its 2012 guidance assumes the completion of $3 billion in stock buybacks, the amount left in the share repurchase program authorized earlier this year by its board, and doesn't reflect potential gains from the contract stand-off between rival drug chain Walgreens and rival PBM Express Scripts. Credit Suisse recently estimated that CVS' retail arm could add at least $1.1 billion in sales from Walgreens, along with $175 million to $180 million in earnings before interest, taxes, depreciation and amortization (EBITDA) and 9 cents in EPS.

At Analyst Day, CVS also confirmed its fiscal 2011 earnings guidance of $2.77 to $2.81 in adjusted EPS from continuing operations. The average estimate of analysts polled by Thomson Financial is for 2011 EPS of $2.80, with the forecast running from a low of $2.79 to a high of $2.83.

"We are well-positioned with our unique suite of assets, which are enabling us to capitalize on the opportunities we see in our industry," Denton told analysts at the event. "Furthermore, generic drugs are expected to drive our profitability in our retail and PBM businesses in both the near and long term. There are approximately $97 billion of branded drugs expected to see generic competition over the next several years, so we see a very significant opportunity for earnings growth through 2015."

As of morning trading on Tuesday, CVS shares were up $2.37 cents, or 6.4%, to $38.92.

President and chief executive officer Larry Merlo pointed to U.S. health care industry trends that present opportunities for CVS, including a costly, overburdened health care system; an aging population; an escalating need for low-cost health solutions, such as preventive care and improved medication adherence; consumers taking more control of their health care decisions as costs shift from employers to employees; an ongoing shortage of primary care doctors; and an increasing need for better integration between physicians and other health care providers.

"As the health care industry adapts to the rapidly changing landscape, CVS Caremark will continue to deliver innovative solutions that lower costs for payers and provide increased access, lower costs and better health outcomes for patients," Merlo stated.

In line with its mantra of "Reinvent Pharmacy for Better Health," CVS is capitalizing on its "integration sweet spots" by building on the capabilities of its retail pharmacy, PBM and MinuteClinic health clinic businesses, according to Merlo.

"We are well-positioned to have a positive impact on the formidable challenges facing our health care system," he added.

Key programs already driving growth at the company — Maintenance Choice and Pharmacy Advisor — are slated to be ramped up, according to CVS.

Plans call for Maintenance Choice 2.0, the next-generation offering of the program that lets mail order patients pick up maintenance medications at a CVS/pharmacy store, to offer "seamless integration" of mail order and retail pharmacies, making it even easier to obtain 90-day prescriptions, the company said.

"It is a game-changing innovation that will provide more clients with the opportunity to experience at least some of the cost savings of Maintenance Choice through a less-restrictive plan design option," CVS stated. "While the savings will not be as high for clients who choose this alternative plan design, their members will have an optional, convenient and cost-effective way to obtain a 90-day supply of maintenance medications at any CVS retail pharmacy at the same cost as mail order. In addition, these clients will retain the flexibility to transition to a more restrictive plan design to achieve even greater savings at their discretion."

CVS also outlined the expansion of the Pharmacy Advisor medication adherence program for chronic conditions, which is currently focused on diabetes and starting in 2012 is slated to include cardiovascular care. With the rollout of Pharmacy Advisor 3.0, the program will add face-to-face pharmacist consultations for patients with hyperlipidemia, hypertension, coronary artery disease and congestive heart failure by the second quarter of 2012; for patients with asthma/COPD, depression, cancer and osteoporosis by the end of the 2012; and for patients with gastrointestinal disorders, rheumatoid arthritis, multiple sclerosis and chronic kidney disease by the end of 2013.

Analyst Mark Miller of William Blair & Co. said CVS Caremark executives made a compelling case for their company's growth prospects at the Analyst Day event.

"Over the years, we have been to about a dozen of these annual events for CVS. In our opinion, this is the best set of presentations we have seen by the company," Miller wrote in a research note released late Tuesday afternoon. "A year ago, we and others were calling for a breakup of the company. Today, after what may be one of the largest turnarounds that we have ever seen for such a large company, CVS Caremark is now able to sell 'quantifiable results,' providing further validation of its integrated business model. Consequently, outperform‐rated CVS Caremark remains one of our top [stock] picks for 2012."

Denton reported that given CVS Caremark's strong growth outlook, the company's board has approved a 30% hike in its quarterly dividend to 16.25 cents per share of common stock, payable Feb. 2, 2012, to shareholders of record as of Jan. 23, 2012. The increase translates into an annual rate of 65 cents per share, up 15 cents per share from the previous annual rate of 50 cents.

"The board's decision to increase the dividend by 30% recognizes that we accomplished what we set out to do in 2011 and that we are in a very healthy position going into 2012," commented Denton. "Combined with the 43% increase in January of 2011, this increase puts us well on track to meet our targeted 25% to 30% dividend payout ratio by 2015. It marks our ninth consecutive year of dividend increases, and this substantial increase reflects our solid financial performance, our optimism with respect to future growth and our very significant cash-generation capabilities."

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