WOONSOCKET, R.I. — Lost business in the pharmacy benefit management unit led to a decline in revenue for the fiscal 2010 second quarter at CVS Caremark Corp., which also missed Wall Street’s earnings forecast.
The drug store chain and PBM company said Wednesday that total sales for the three months ended June 30 fell 3.5% to $24 billion from $24.9 billion a year earlier.
Revenue in the pharmacy services segment dropped 9% to $11.8 billion in the 2010 quarter. Adjusting the growth rate for the impact of new generics, sales would have fallen 3.1%, according to the company. CVS Caremark said the decrease stems mainly from the termination of a few large client contracts effective Jan. 1 and the decrease of covered lives under its Medicare Part D program resulting from the 2010 Medicare Part D competitive bidding process, which was partially offset by new client starts as of Jan. 1.
"We expect PBM operating profit performance to remain weak through the balance of fiscal 2010," analyst Helene Wolk of Sanford Bernstein & Co. said in a research note.
However, sales in the retail pharmacy business rose 3.7% to $14.3 billion in the second quarter, with same-store sales up 2.1% year over year.
Pharmacy same-store sales gained 2.9%, reflecting a positive impacted of about 290 basis points from the continued growth of the Maintenance Choice program and a negative impact of about 180 basis points from recent generic introductions and the comparison against the rise in business from last year’s H1N1 flu outbreak, CVS Caremark reported. In the front end, same-store sales inched up 0.4% in the quarter and were negatively impacted by an earlier Easter, the inclusion of acquired Longs Drug stores and by the comparison against last year’s H1N1 outbreak, the company said.
"Notably, CVS’ comp performance in second-quarter 2010 remained better than peers … reflecting the continued benefit from Maintenance Choice," Wolk wrote in her report. "We believe tight operating expense control mitigated the retail sales weakness."
On the earnings side, income from continuing operations attributable to CVS Caremark in the 2010 second quarter fell 7.5% to $822 million, or 60 cents per diluted share, from $889 million, or 60 cents per diluted share, in the prior-year period.
Adjusted earnings per share from continuing operations, which excludes $106 million of intangible asset amortization related to acquisition activity, for the 2010 quarter were 65 cents, including 3 cents per diluted share of accruals in the retail pharmacy business for anticipated legal settlements, versus 65 cents in the year-ago period, the company said.
The average earnings estimate of financial analysts for CVS Caremark’s second quarter was 68 cents per share, with the forecast ranging from a low of 67 cents to a high of 70 cents, according to Thomson Financial.
"I’m pleased with our results for the second quarter, especially given the challenging retail pharmacy environment," CVS Caremark chairman and chief executive officer Tom Ryan said in a statement. "Despite lower-than-expected retail sales growth, we were able to exercise disciplined expense control and to deliver on the bottom line. Our PBM business produced results as expected this quarter and has made terrific progress in the selling season for 2011 as more clients embrace our ability to provide quality pharmacy care while lowering overall health care costs and improving outcomes.
"I couldn’t be happier with our new contract wins to date, including our long-term agreement with Aetna," Ryan added. "We’re very pleased to be partnering with Aetna and believe our integrated approach and multichannel platform will help Aetna deliver exceptional results for its clients and members."
CVS Caremark described the 12-year Aetna contract, announced Tuesday evening, as "among the largest and longest-term contracts ever to have been negotiated in the PBM industry."
The company said it expects significant long-term financial benefits from the agreement, which is projected to be 1 cent to 2 cents dilutive to adjusted earnings per share in 2010 because of implementation expenses and then to be 1 cent to 3 cents accretive to adjusted earnings per share in 2011, more than 5 cents accretive in 2012 and to generate more than double that level of accretion in 2013 once the contract is fully implemented.
Wolk commented about the Aetna contract, "We view the agreement positively as it reflects confidence in CVS’ PBM capabilities and the viability of the integrated retail/PBM model."
Still, CVS Caremark said that it was lowering its guidance for the current fiscal year because of anemic economic trends.
"The weak economy has had a dampening impact on prescription utilization and consumer behavior across the retail pharmacy sector, which has affected our sales performance," stated David Denton, executive vice president and chief financial officer. "Having said that, we continue to outpace the industry and to gain market share at a healthy pace."
The company reduced its retail same-store sales guidance for 2010 to a gain of 2% to 3.5% from the previous projection of 3.5% to 5.5%. Its forecast for adjusted earnings per share for 2010, meanwhile, was lowered to a range of $2.68 to $2.73 from the previous range of $2.77 to $2.84. The earnings guidance revision results from the reduced retail sales forecast and higher-than-expected legal accruals and expenses, as well as from the initial dilution related to implementation costs for the Aetna contract, according to the company.
For fiscal 2010, the average earnings estimate of analysts is $2.79 per share, with the projection ranging from a low of $2.72 to a high of $2.84, Thomson Financial reported.
During the second quarter, CVS Caremark opened 50 new drug stores, closed four drug stores and two specialty pharmacy stores, and relocated 28 drug stores. As of June 30, the company operated 7,109 drug stores, 45 specialty pharmacy stores, 18 specialty mail-order pharmacies and six mail-order pharmacies in 44 states, the District of Columbia and Puerto Rico.
