WOONSOCKET, R.I. — CVS Caremark Corp. cited gains in its pharmacy benefit management business and continued growth in its retail pharmacy segment as driving revenue and profit increases for its third quarter.
For the three months ended Sept. 30, overall revenue rose 12.5% to $26.7 billion from $23.7 billion a year earlier, CVS Caremark said Thursday.
Retail pharmacy sales were up 3.8% year over year to $14.7 billion. Same-store sales grew 2.3%, reflecting gains of 2% in the front end and 2.4% in the pharmacy. CVS Caremark noted that pharmacy comparable-store sales included a net positive impact of 140 basis points from its Maintenance Choice program and a negative impact of 200 basis points from recent generic drug introductions.
"At retail, sales of $14.7 billion were in line with expectations, driven by slightly higher‐ than‐expected same‐store sales growth of 2.3%," analyst Mark Miller of William Blair & Co. said Thursday in a research note. "Gross margins fell 20 basis points year over year to 29.3% because of lower pharmacy reimbursement rates and the continued rapid growth of Maintenance Choice. However, operating margins increased 30 basis points to 7.6%, driven by solid store‐level expense control. Retail operating profits rose 8%, to $1.1 billion."
In the PBM segment, CVS Caremark saw sales rise 25.8% to $14.8 billion in the third quarter. The company attributed the gain mainly to the addition of its long-term contract with Aetna Inc. plus new activity from its acquisition of the Medicare prescription drug business of Universal American Corp.
On the earnings front, CVS Caremark beat Wall Street’s expectations for the third quarter. The company said income from continuing operations attributable to CVS Caremark for the quarter was $868 million, up from $816 million a year earlier, driven primarily by improved operating profit in the retail pharmacy segment. Adjusted earnings per share (EPS) from continuing operations attributable to CVS Caremark came in at 70 cents, higher than the year-ago adjusted EPS of 64 cents and above the average analyst estimate of 68 cents, according to Thomson Financial. The analyst forecast ranged from a low of 66 cents per share to a high of 69 cents.
"I’m very pleased with our third-quarter results, which were 2 cents above the high end of our guidance range," Larry Merlo, president and chief executive officer of CVS Caremark, said in a statement. "This outperformance was primarily driven by better-than-expected performance in our PBM as well as accretion from our recently executed $1 billion accelerated share repurchase.
"Our retail drug store business continues to grow and gain share, while our PBM continues to demonstrate success in the selling season, with strong client retention and significant new business," Merlo added. "I fully expect the company to deliver substantial free cash flow for the foreseeable future."
During the third quarter, CVS Caremark opened 39 new retail drug stores, closed one store and relocated 14 stores. As of Sept. 30, the company operated 7,304 retail drug stores.
Looking ahead, CVS Caremark narrowed its earnings guidance for 2011 to the higher end of the previous range. The company said Thursday that it now expects adjusted EPS from continuing operations of $2.77 to $2.81, compared with its prior guidance of $2.75 to $2.81. The average analyst forecast is for 2011 earnings of $2.78 cents, ranging from a low of $2.72 to a high of $2.81, according to Thomson Financial.
"In light of recent industry developments, we feel incrementally better about the combined strategic assets owned by CVS Caremark," Miller wrote. "With its 90-day at retail’ (i.e. Maintenance Choice) option offering 4% savings to payers (and increased convenience for payers’ beneficiaries), we believe [Wall] Street sentiment may shift toward viewing the combined retail/PBM entity as the winning model in the U.S. pharmacy industry."
