2nd UPDATE: CVS Caremark 4Q Net Up 3.7%; Lifts Full-Year Outlook
February 08 2012 - 12:25PM
Dow Jones News
CVS Caremark Corp.'s (CVS) fourth-quarter profit rose 3.7% as
pharmacy services and retail revenue each grew, though results were
tempered by weaker-than-expected holiday sales and a muted flu
season.
CVS raised its full-year earnings guidance by 3 cents a share,
as the company anticipates a greater-than-expected benefit from
business being driven away from rival Walgreen Co. (WAG) due to its
impasse with pharmacy-benefits manager Express Scripts Inc.
(ESRX).
President and Chief Executive Larry Merlo told analysts during
the company's conference call that while the dispute between
Walgreen and Express Scripts didn't materially boost the latest
quarter's results, "we are seeing a significant number of
transfers" in the current quarter. CVS has launched marketing and
in-store investments to court influx customers.
Merlo said CVS is gaining "more than our fair share" of the
business Walgreen lost, though he cautioned the rosier view didn't
incorporate further gains later this year, as he said an agreement
could be reached at any time. Walgreen allowed a contract with
Express Scripts to expire at the end of last year due to a rate
dispute.
When asked about CVS's ability to retain new customers if
Walgreen and Express Scripts were to reach an agreement, Merlo
struck an upbeat tone, saying "we know that the pharmacy customer
is the hardest person to lose, but once you lose them, it's the
hardest person to get back."
He added as the impasse continues, CVS would have an opportunity
to refill a prescription a few times and give the customer an
opportunity to get to know the pharmacist and store's staff.
The news comes after Walgreen last week reported same-store
sales slid 4.6% in January, a greater decline than analysts
expected, as prescription sales were battered by the loss of
Express Scripts. Walgreen's management has said it expected January
would be hurt the most from the loss of that business, though
Walgreen contends it will see improvement as the year
progresses.
CVS's shares ended last year with a 17% gain, exceeding the
broader market's growth and far better than the 15% drop for
Walgreen, as investors and analysts praise the company's
integration of pharmacy-benefits manager Caremark. CVS has touted
the success of its MinuteClinic retail health-care centers and
observers are banking on the CVS benefiting from the contract
expiration between Walgreen and Express Scripts.
In the latest quarter, revenue in the company's pharmacy
services segment jumped 32%, again boosted by a contract with Aetna
Inc. (AET) as well as an acquisition of a Medicare prescription
drug business last year. On the retail side of the pharmacy
business, sales were up 4% as same-store sales climbed 2.5%.
CVS reported a profit of $1.06 billion, or 81 cents a share, up
from $1.03 billion, or 75 cents a share, a year earlier. Adjusted
earnings from continuing operations, which excludes such items as
tax benefits, rose to 89 cents a share from 79 cents.
Revenue jumped 15% to $28.32 billion.
In November, CVS predicted earnings of 87 cents to 91 cents a
share and total sales growth of 13% to 15%.
Gross margin narrowed to 19.6% from 22.2%.
Chief Financial Officer David Denton said margins were hurt by
holiday promotions, the growth of Maintenance Choice and pressure
from pharmacy reimbursement rates. Weaker-than-expected holiday
sales and a muted flu season were also factors, as those categories
often carry a higher margin.
Despite a weak flu season, the company's MinuteClinic retail
health-care centers posted 40% revenue growth as CVS continues to
add new services and raise awareness. In one example, Merlo said
CVS launched a marketing campaign to capitalize on a new Texas law
requiring college students be vaccinated against meningitis before
school began in January, resulting in a jump in vaccinations.
CVS estimated first-quarter adjusted earnings of 61 cents to 63
cents a share, compared with analysts' forecasts of 61 cents,
according to Thomson Reuters.
For the full year, CVS now forecasts adjusted per-share earnings
from continuing operations of $3.18 to $3.28, up from the December
view of $3.15 to $3.25.
Separately, a CVS spokeswoman said a federal court on Tuesday
granted a temporary restraining order to allow two Florida
pharmacies to continue filling prescriptions for certain controlled
drugs after the Drug Enforcement Administration took action on
Saturday to halt such sales. The DEA's actions against two Sanford,
Fla., CVS stores is related to the agency's allegations that four
pharmacy customers of drug distributor Cardinal Health Inc. (CAH),
including these CVS outlets, dispensed the pain drug oxycodone
based on bad prescriptions.
While CVS will resume filling prescriptions at the two
locations, it offered to not dispense oxycodone and other so-called
Schedule II controlled substances at the two stores until the case
is resolved.
Shares were up 1.7% to 43.82 in recent trading.
-By John Kell, Dow Jones Newswires; 212-416-2480;
john.kell@dowjones.com
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