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Merlo: CVS Caremark is in a sweet spot
May 10th, 2012
WOONSOCKET, R.I. – In today’s complex health care market, CVS Caremark Corp. has the right business model and the right game plan to drive innovation in pharmacy care and spur company growth, president and chief executive officer Larry Merlo said at the annual shareholders meeting here.
“Our purpose as a company is to help people on their path to better health,” Merlo told a gathering of stockholders Thursday at CVS Caremark’s headquarters in Woonsocket. “We have executed successfully on our core initiatives, and we are well-positioned for growth in 2012 and beyond.”
He and chief financial officer David Denton pointed to CVS Caremark’s robust first-quarter results as proof that the company’s integrated model – a traditional drug store chain, a retail health clinic operation and a pharmacy benefit manager (PBM) – is clicking in the marketplace.
Overall revenue surged 19.9% to $30.8 billion in the first quarter ended March 31. Retail pharmacy sales rose 9.9% to $16 billion, and same-store sales climbed 8.4%, reflecting gains of 9.8% in the pharmacy and 5.3% in the front end. Meanwhile, the PBM’s revenue jumped 32.3% to $18.3 billion.
Earnings growth was also healthy in the quarter. Income from continuing operations came in at $777 million, or 65 cents per share, up from $710 million, or 57 cents per share, a year earlier and exceeding analysts’ average per-share projection of 63 cents.
A highlight of the quarter, Merlo said, was CVS/pharmacy’s deft response to the contract dispute between rivals Walgreen Co. and Express Scripts Inc., which has generated significant new prescription business.
“Our retail team has done an outstanding job in capitalizing on this opportunity,” he said.
CVS expects further success in drawing new pharmacy customers as long as the Walgreens-Express Scripts impasse continues, Merlo added. More than 40% of CVS stores are within one mile of a Walgreens, and around 80% are within three miles of a Walgreens, he said.
The Walgreens-Express Scripts situation added earnings per share (EPS) of 3 cents in the first quarter, and CVS anticipates a gain of 3 cents to 4 cents in the second quarter. “We’re taking this Walgreens-Express Scripts benefit one quarter at a time,” Merlo said.
Both he and Denton noted that the quarterly results built on a strong 2011 performance.
CVS Caremark topped the $100 billion mark last year, as total revenue advanced 11.8% to $107.1 billion from $95.8 billion in 2010. Sales grew 3.9% to $59.6 billion in the drug store segment and 24.9% to $58.9 billion in the PBM unit. Adjusted EPS for 2011 was $2.80 in line with the consensus analyst estimate and well above the $2.68 posted in 2010.
“2011 was a great year of accomplishment for our company,” Merlo told shareholders. Last year CVS Caremark won over $7 billion in new PBM business; acquired Universal American Corp.’s Medicare Part D business, which has proved to be one of Caremark’s fastest-growing segments; and opened 247 drug stores, he said.
Retail catalysts include the ExtraCare loyalty program (now with over 69 million active cardholders), CVS’ digital strategy and the company’s store-brand and store clustering initiatives.
“We continue to gain share in both the front of the store and in the pharmacy,” Merlo noted, adding that another milestone in 2011 was MinuteClinic reaching break-even point in profitability. One hundred new MinuteClinics opened last year, and CVS Caremark aims to have over 1,000 clinics by 2016.
“When you look at our three business units, they’re all performing very well,” Merlo said. “Our suite of assets is well-aligned with the direction of health care.”
Going forward, a core focus for CVS Caremark will be to hit the “integration sweet spots,” where the company can leverage its unique business model to enhance and expand pharmacy care and improve health outcomes for patients, according to Merlo.
As examples he cited the company’s Maintenance Choice, Pharmacy Advisor and Caremark Member Care at MinuteClinic programs. He said Pharmacy Advisor is being expanded to cover more disease states, the latest additions being cardiovascular and diabetes care, and starting early next year the program will be extended to Medicare and Medicaid beneficiaries. CVS Caremark, too, is developing an integrated specialty pharmacy care solution.
“We see pharmacy innovation as essential to meeting future health care challenges,” Merlo said.
Payers and employers will find CVS Caremark’s innovative, integrated pharmacy and health care offerings especially compelling, he pointed out. The company expects to add $12.6 billion in PBM cumulative net new business in 2012, up from $10.8 billion in 2011.
“We’re bullish about the receptivity to our model,” Merlo commented.
Reflecting the confidence in its performance and growth strategy, CVS Caremark has raised its 2012 adjusted EPS forecast to between $3.23 and $3.33, up from its previous guidance of $3.18 to $3.28. Analysts now project CVS Caremark’s adjusted EPS for 2012 at $3.31 on average, with estimates ranging from a low of $3.26 to a high of $3.35.
“In 2011 we executed on a number of very important initiatives for our company,” Denton said. “We are on track to have an even better year for 2012.”