CVS Caremark reports 'strong' Q2 as enterprise assets deliver results

Raises, narrows 2014 earnings guidance

WOONSOCKET, R.I. — As today’s healthcare market continues to evolve, CVS Caremark’s portfolio of enterprise assets is enabling the company to provide innovative solutions and products that are delivering results, as evidenced by its “strong” second-quarter results released Tuesday morning.

“As the health care environment evolves we are uniquely positioned to address the quality, affordability and accessibility issues in the healthcare system today,” president and CEO Larry Merlo told analysts during Tuesday morning’s conference call. “So, we are highly focused on the unique opportunities we see for growth and we will continue to take and active and growing role in shaping the future of healthcare.”

Net income for the quarter increased 10.9% to $1.2 billion, compared with approximately $1.1 billion in the year-ago period.

Adjusted earnings per share for the three months ended June 30, 2014 and 2013, was $1.13 and 97 cents, respectively, an increase of 16.5%. Adjusted EPS in the three months ended June 30, 2014 excludes $133 million and $124 million in 2014 and 2013, respectively, of intangible asset amortization related to acquisition activity, the company stated.

Net revenues for quarter ended June 30 increased 10.7%, or approximately $3.4 billion, to $34.6 billion compared with the year-ago period.

Revenues in the Pharmacy Services Segment increased 16.2% to $21.8 billion during the quarter, driven by net new business, growth in specialty pharmacy including the acquisition of Coram and the impact of its new Specialty Connect, drug inflation and product mix, partially offset by an increase in generic dispensing.

Specialty Connect integrates the company's mail and retail capabilities, providing members with the choice to bring their specialty prescriptions to any CVS/pharmacy location. Whether submitted through our mail order pharmacy or at CVS/pharmacy, all prescriptions are filled through the company's specialty mail order pharmacies, so all revenue from this specialty prescription services program is recorded within the Pharmacy Services Segment.
Members then can choose to pick up their medication at their local CVS/pharmacy or have it sent to their home through the mail.

The Specialty Connect offering has been well received by clients and patients, according to the company. As of the July, more than 60,000 specialty patients have transitioned to this model.

“The program is generating high satisfaction scores with patients. It resonates with clients as a differentiated approach to simplifying the specialty process for members and physicians appreciate the ease of use in getting patients started on therapy,” Merlo told analysts.

In providing a PBM 2015 selling update, the company stated that gross wins for 2015 is currently $5.4 billion. Net new business is $2.6 billion. As for renewals, the company has completed nearly $26 billion in business up for renewal with a retention rate of nearly 97%.

“I think our selling season success reflects our track record of generating savings for our clients through our unique suite of capabilities. Top of mind for clients this selling season is achieving better control of their specialty spend,” said Merlo.

Retail segment sees boost in revenues

Revenues in the Retail Pharmacy Segment increased 4.5% to $16.9 billion. Same-store sales increased 3.3%, with pharmacy same-store sales up 5% and front-end same-store sales down 0.4%.

Despite a positive impact of approximately 80 basis points from the shift of the Easter holiday, front-end store-same sales were negatively impacted by softer customer traffic, partially offset by an increase in basket size. In addition, front-end same-store sales are beginning to be impacted by tobacco. In February, the company announced that it will stop selling cigarettes and other tobacco products at its more than 7,600 CVS/pharmacy stores across the United States by Oct. 1.

“As we plan for exiting the tobacco category this fall, we have begun to see a sales impact,” Merlo told analysts, noting that front-end same-store sales would have been approximately 110 basis points higher if tobacco and the estimated associated basket sales were excluded. “Now, adjusting for this tobacco impact and the Easter shift, front-store comps were roughly flat in the quarter, sequentially improving from Q1. Front store traffic as customers continued to aggregate their trips and, at the same time, our average basket size continued to increase, reflecting the strength of our Loyalty program and the personalization it enables us to offer.”

Pharmacy same-store sales were negatively impacted by approximately 160 basis points from recent generic drug introductions and by approximately 130 basis points from the implementation of Specialty Connect. The implementation of Specialty Connect had a greater effect on revenues than prescription volumes because of the higher dollar value of specialty products, the company stated.

Commenting on the acquisition of Hispanic-owned pharmacy retailer Navarro Discount Pharmacy, Merlo said the company expects to maintain the current product mix and will share its learnings of Hispanic marketing and merchandising with other CVS markets where it makes sense.

“The Navarro brand is one of the most recognizable in the Hispanic marketplace. We plan to retain it. As you recall, we adopted a similar strategy in maintaining the Longs Drug name for our acquired locations in Hawaii and that has been successful,” Merlo said.

The Navarro transaction is expected to be completed later this year.

In light of its “strong performance” during the quarter, the company raised and narrowed its earnings guidance range for the full year 2014. It now expects to deliver adjusted EPS of $4.43 to $4.51, up from $4.36 to $4.50. GAAP diluted EPS from continuing operations was raised to $4.16 to $4.24, up from $4.09 to $4.23. It continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, while the 2014 cash flow from operations range was raised to $7.2 billion to $7.5 billion, up from $7.0 to $7.3 billion. The company expects to deliver adjusted EPS of $1.11 to $1.14 and GAAP diluted EPS from continuing operations of $1.04 to $1.07 in the third quarter of 2014
 

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