The influx of new generic drugs hoisted earnings above Wall Street's forecast but tempered sales growth in the first quarter at CVS Caremark Corp.

CVS Caremark, first quarter, new generic drugs, Larry Merlo, CVS/pharmacy, PBM, pharmacy services, retail pharmacy, drug store, introductions of generic drugs, revenue, same-store sales, comparable-store sales, comp-store sales, comparable pharmacy sales, prescription volume, front end, Maintenance Choice, adjusted EPS, Mark Miller, William Blair & Co.

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New generics boost CVS Caremark's 1Q profit

May 1st, 2013

WOONSOCKET, R.I. – The influx of new generic drugs hoisted earnings above Wall Street's forecast but tempered sales growth in the first quarter at CVS Caremark Corp.

CVS said Wednesay that for the three months ended March 31, income from continuing operations attributable to CVS Caremark surged 23.1% to $956 million, or 83 cents per share, from $777 million, or 65 cents per share, a year earlier.

On average, financial analysts projected CVS' adjusted earnings per share (EPS) at 79 cents, with estimates ranging from a low of 78 cents to a high of 82 cents, according to Thomson Financial. CVS noted that adjusted EPS exclude $122 million and $118 million of intangible asset amortization from acquisition activity in the 2013 and 2012 first quarters, respectively.

The jump in net income was fueled mainly by introductions of generic drugs, which boosted operating profit in its CVS/pharmacy retail drug store and pharmacy benefit management business units, CVS said. Generic medications carry lower prices but provide bigger profit margins. The company reported that in the first quarter, the generic dispensing rate rose about 300 basis points year over year to 81.2% in its retail pharmacy segment and by 400 basis points to 80.5% in its pharmacy services (PBM) segment.

"I'm very pleased with our strong first-quarter results," CVS Caremark president and chief executive officer Larry Merlo said in a statement. "As expected, the influx of new generic drugs was a key driver across the enterprise, resulting in solid gross-margin expansion as well as significant growth in operating profit and earnings. In fact, operating profit grew well beyond our expectations across the enterprise, and we delivered EPS that was 3 cents above the high end of our guidance. This outperformance was driven by stronger-than-expected prescription volumes due in large part to the strong flu season, strong specialty [drug] growth, and favorable purchasing and rebate economics."

Merlo added, "Furthermore, we generated a substantial amount of free cash this quarter. We remain committed to our disciplined capital allocation strategy, which is enabling us to return significant value to our shareholders through both dividends and share repurchases."

For the first quarter, total sales came in virtually flat, dipping 0.1% to $30.76 billion, from nearly $30.80 billion in the prior-year period.

Revenue in the retail pharmacy segment edged up 0.2% in the first quarter. However, same-store sales fell 1.2%, including a decrease of 2.3% in the pharmacy and a gain of 1.4% in the front end.

CVS said comparable-store sales results reflect the impact of new generics, a strong flu season, the shift of the Easter holiday from April in 2012 to March in 2013, and the absence of leap day in 2013.

In the pharmacy, comp-store prescription volume rose by 2% when 90-day prescriptions are counted as one prescription and by 4.7% on a 30-day equivalent basis. CVS said that comparable pharmacy sales were negatively impacted by 925 basis points from new generics, while the high incidence of flu positively impacted pharmacy same-store sales by 90 basis points. The absence of leap day had a 70-basis-point negative impact on comparable pharmacy sales.

Front-end same-store sales in the first quarter got a lift of 65 basis points from the earlier Easter holiday but reflect a 120-basis-point negative impact from the absence of a leap day versus a year ago.

"Retail pharmacy same-store script growth increased a strong 4.7%, despite losing a portion of the prescriptions gained from the Walgreens/Express Scripts contract impasse last year," William Blair & Co. analyst Mark Miller said in a research note released Wednesday. "[CVS] management notes the retention rate is still expected to exceed 60% for 2013 and is tracking favorably to this expectation."

Sales in the PBM segment inched up 0.1% in the first quarter. According to CVS, the growth was primarily driven by volume increases across all channels and drug cost inflation in its specialty pharmacy business, mostly offset by the impact of new generic introductions.

CVS added that the revenue gains in its drug store and PBM businesses were offset by an increase in intersegment activity driven mainly by the continued adoption of its Maintenance Choice program, in which mail-order pharmacy customers can pick up their prescriptions in CVS/pharmacy stores.

During the first quarter, CVS opened 37 new retail drug stores, closed nine stores and relocated 15 stores. As of March 31, the company operated 7,531 retail drug stores, as well as 18 on-site pharmacies and 31 retail specialty pharmacy stores.

Looking ahead, CVS lifted the low end of its earnings guidance range for 2013 to reflect the solid first-quarter performance. The company now projects adjusted EPS of $3.89 to $4.00, compared with its earlier forecast of $3.86 to $4.00. CVS added that the guidance includes the estimated impact on its Medicare Part D business from sequestrationplus costs in its Part D business related to resolving issues that arose fter plan consolidation at the start of the year. 

The consensus analyst estimate for CVS' 2013 adjusted EPS is $3.97, with the forecast running from a low of $3.90 to a high of $4.10, according to Thomson Financial.