CVS Caremark Corp. surpassed its financial goals in 2012 and, with its retail pharmacy/PBM business model, is well-positioned to address the changing health care environment going forward, president and chief executive officer Larry Merlo said at the company's Analyst Day event in New York City.

CVS Caremark, Analyst Day, Larry Merlo, David Denton, CVS/pharmacy, MinuteClinic, Caremark, PBM, pharmacy benefit management, health care, Affordable Care Act, earnings, guidance, drug store chain, retail health clinic, medication adherence, dividend, retail pharmacy, health care reform, specialty pharmacy, primary care, Mark Miller, William Blair & Co., Russell Redman

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Merlo: CVS Caremark 'outperformed' in 2012

December 13th, 2012
Larry Merlo

NEW YORK – CVS Caremark Corp. surpassed its financial goals in 2012 and, with its retail pharmacy/PBM business model, is well-positioned to address the changing health care environment going forward, president and chief executive officer Larry Merlo said at the company's Analyst Day event in New York City.

"Going into 2012, we set challenging, yet achievable, financial targets and I am pleased to report that we outperformed those expectations," Merlo said Thursday. "Earnings per share and cash flow are expected to be solidly ahead of our initial plan. These strong results set the stage for continued enterprise growth in 2013 and beyond."

Merlo and other company executives noted at the meeting that CVS Caremark brings to the table a unique blend of assets to meet the needs of consumers, employers and payers as health care reform takes hold: CVS/pharmacy, a retail drug store chain; Caremark, a pharmacy benefit management business; and MinuteClinic, a retail health clinic operation.

"Health care is going through a period of intense change, change that will be accelerated by the implementation of the Affordable Care Act (ACA) as well as underlying demographic shifts, advances in technology and changes in consumer and patient behavior," Merlo told analysts.

"The future health care environment will be defined by the more than 30 million newly insured Americans as a result of ACA; incentives for physicians to improve outcomes, quality and cost-effectiveness of care; rising prevalence of chronic disease; and growth in pharmacy that is primarily driven by innovation in biologic specialty drugs," he explained. "Additionally, shifts in funding sources for health care coverage will increase the importance of providing cost-effective, high-quality, innovative solutions to government programs and health plans."

CVS Caremark's multiple points of contact in the pharmacy and health care arena offer consumers and PBM clients a range of effective options, Merlo added. "We continue to believe that our goals of providing greater access and convenience, improving health outcomes and lowering overall costs align very well with the direction in which health care is headed. We are leveraging our enterprise assets to provide solutions that drive long-term growth and value."

Executives said key elements of CVS Caremark's strategic plan include advancing new interventions to improve medication adherence; stepping up expansion of MinuteClinic and extending of its menu of primary care services; expanding specialty pharmacy services; identifying opportunities for solutions that address provider needs to support patient outcomes; partnering more closely with health plans; and boosting digital capabilities across the enterprise to address patient information and product needs seamlessly

"Our strategic growth framework provides the lens through which we will make strategic investments and prioritize initiatives," Merlo stated. "We are capitalizing on our suite of assets to drive results and enhance value for clients, customers and shareholders."

At the event, chief financial officer David Denton reaffirmed CVS Caremark's guidance for 2012 and outlined its guidance for 2013, with the company's forecast topping analysts' estimates for next year.

In reporting third-quarter results last month, the company raised and narrowed its 2012 guidance to adjusted earnings per share (EPS) of $3.38 to $3.41, up from the previous forecast of $3.32 to $3.38 per share. On average, analysts estimate earnings of $3.40 per share for 2012, with projections ranging from a low of $3.35 to a high of $3.43, according to Thomson Financial.

Denton said that for 2013, CVS Caremark projects adjusted diluted EPS from continuing operations of $3.84 to $3.98, which would mark an increase of 13.25% to 17.25%. That guidance assumes the completion of $4 billion in share buybacks during 2013, he added.

The consensus analyst estimate for CVS Caremark's 2013 earnings is $3.82 per share, with the forecast ranging from a low of $3.72 to a high of $4.10, Thomson Financial reported.

Also at Analyst Day, CVS Caremark announced that its board has approved an increase in its quarterly dividend of about 38%, to 22.5 cents per share of common stock payable Feb. 4, 2013, to shareholders of record as of Jan. 24, 2013. The increase translates into an annual rate of 90 cents per share, up 25 cents from the previous annual rate of 65 cents.

"The board's decision to increase the dividend by 38% reflects our strong performance and outlook as well as our very significant cash generation capabilities," Denton stated. "In late 2010, we set a dividend payout ratio target of 25% to 30% by 2015, which implied a compounded dividend growth rate of approximately 25% per year from 2010. Today's increase allows us to meet our 25% dividend payout ratio target two years early and marks our tenth consecutive year of dividend increases."

As of mid-morning trading Thursday, CVS Caremark's shares were up $1.17, or 2.5%, to $48.71. The company also topped its 52-week high in earlier trading Thursday, with shares climbing to $49.80.

William Blair & Co. analyst Mark Miller pointed to several positive factors for CVS Caremark in 2013, including an influx of higher-margin generic drugs and the likelihood that the company will hold onto most of the pharmacy customers picked up from the contract dispute between rivals Walgreen Co. and Express Scripts Inc.

"Key considerations to the 2013 guidance include the expectation for 60% retention of Walgreens customers gained during the impasse, a further benefit from generics as more enter "the breakout" phase in 2013, and a stable consumer," Miller wrote in a research note Thursday on CVS' Analyst Day event. "Despite cautious commentary from Walmart and Dollar General earlier this week, CVS indicated that while it is still seeing a value-oriented consumer, it does not expect a deterioration (or improvement) in consumer spending behavior in 2013."

Miller added that investors are recognizing the potential of CVS Caremark's unique blend of pharmacy and health care businesses.

"We believe Thursday's presentation will enhance investor appreciation for the company's integrated model. Demonstrable payer savings are being achieved with higher 90-day script penetration, greater adherence and ability to take lower gross profit per script as a trade-off for higher volumes (e.g. market share gains with Maintenance Choice)," he stated in his report. "CVS' channel-agnostic approach improves the positioning of the PBM (and enterprise overall) as mail service is expected to decline with share shift from employer to health plans."