CVS Caremark (
), the largest U.S. pharmacy based on total prescription revenue,
reported its Q4 2013 and full year earnings on February 11.
Supported by strong performance in both the retail pharmacy
and pharmacy services segments, the company reported 4.6% annual
growth in its Q4 2013 revenue ($32.8 billion). Drug price
inflation in the specialty business combined with new
specialty clients and products contributed to 5.2% growth in the
PBM segment and strong pharmacy same-store sales led to 5.6% growth
in CVS' retail business. Growth in the quarter was partially offset
by an increase in the generic dispensing rate which grew 1.1%
annually to 81.1% and a marginal decline in its front store
Though CVS witnessed a slight annual decline in its gross margin
and operating margin in Q4 2013, it delivered strong bottom line
growth for the full year. In 2013, CVS's net income increased by
18.5% compared to 2012. The company generated $1.3 billion of
free cash flow during Q4 2013 and approximately $4.4 billion
It opened 58 net new stores in Q4 2013, which takes the total to
7,659 stores. CVS is the second largest drugstore chain in the
U.S. after Walgreen and remains committed to its goal to
create a national primary care platform that provides integrated
high quality care that is convenient, accessible and affordable.
CVS' management remains confident that the company can gain market
share across its offerings.
Our price estimate of $65 for CVS Caremark
is almost in line with the current market price. We are in the
process of updating our valuation for the 2013 earnings.
View our detailed analysis for CVS Caremark
Strength In CVS' Core Business To Offset Lower Tobacco
Earlier this month, CVS declared its decision to exit the
tobacco industry by the end of October 2014. The company feels that
the decision is consistent with its growing role in the
changing healthcare marketplace. It sees this as
an opportunity to connect with consumers as an expert in
health and beauty and to build loyalty with them.
On a 12-month basis, CVS estimates that it will loose
approximately $2 billion in annual revenue from tobacco sales and
an additional $0.5 billion from the rest of the shoppers' basket.
Given the expected timing for implementing this change, this will
cost $0.06 to $0.09 per share in 2014. However, CVS is confident of
maintaining its earnings and segment operating profit guidance as
well as the five-year financial targets provided at its Analyst Day
conference. It believes that the growing strength in its core
business, especially the retail pharmacy business, as well as
its profit enhancing initiatives will help offset
the $.06 to $.09 EPS shortfall.
Impact of the Affordable Care Act; CVS Is Well-Positioned
to Serve New Customers
Though the enrollment on the public healthcare exchanges has
been slow and bumpy at the outset, CVS claims that all signs point
to improvements in the enrollment process and increasing awareness
among eligible consumers. The latest data shows 3 million exchange
enrollees. In January'14, HHS reported that December Medicaid
terminations were up 73% over a three-month baseline period in
states expanding Medicaid. ((
CVS Caremark's CEO Discusses Q4 2013 Results -
Earnings Call Transcript
, Seeking Alpha, February 11, 2014))
The aging U.S. population and the introduction of the
Affordable Care Act, which is set to expand insurance to
approximately 30 million Americans, are key trends driving growth
in the pharmaceutical industry. Total prescription revenues of
U.S. drugstores are expected to reach $350 billion by the end of
2015, growing at 5.3% annually. With its Pharmacy Services
) and in-store clinics to help with basic healthcare needs, we
think CVS is well-equipped to leverage growth in health care
On account of Walgreen's payment dispute with Express Scripts,
many Walgreen customers switched over to its competitors last
year. CVS aimed to retain a minimum of 60% of the
Walgreen scripts in 2013. In its earnings call, CVS reported that
its retention rate was ahead of its exception and does not expect
any change in the same going forward.
Agreement with Cardinal Health To Help Source
CVS recently signed a 10-year agreement with Cardinal
Health to form the largest generic sourcing and entity in the U.S.,
the largest generic drugs market. With the combined
volume and capabilities of the two companies, the venture
can help spur innovative purchasing strategies with generic
manufacturers that create value while enhancing supply chain
The increasing generic substitution in the last few years put
pressure on CVS' top line growth, as they are priced lower
compared to branded drugs. The total generic dispensing rate,
which implies the percentage of generic drugs in a consumer's
prescription, grew to 78.5% in 2012 from 74.1% and 71.5% in 2011
and 2010, respectively. Generic drugs continued to replace
branded drugs in 2013, albeit at a slower pace.
The agreement with Cardinal Health can enable CVS
to negotiate better prices for generic drugs.
Q1 2014 Outlook
- Revenue to increase 4.25% to 5.50%. Retail revenue to grow by
3% to 4.5%.
- Retail and PBM operating profits to grow by 14.5% - 16.5% and
21.25% - 28.25%, respectively.
- GAAP diluted EPS of $0.97 to $1 per share.
- Revenue growth of 4.25% to 5.5%.
- Retail revenue to growth between 0.75% to 2%. PBM
revenue to increase 7.25% to 8.5%.
- Retail operating profit growth of 7% to 8.75%. PBM
operating profit to be up 6.75% to 10.75%.
- Adjusted EPS to be between $4.36 and $4.50.
- GAAP diluted EPS from continuing operations to be in the
range of $4.09 to $4.23.
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