) reported second quarter 2012 EPS of 75 cents, up 25% year over
year. However, after excluding the impact of certain acquisition
related expenses from both the periods, the adjusted EPS in the
reported quarter came in at 81 cents, ahead of the Zacks Consensus
Estimate by 2 cents and 14.0% higher than the year-ago quarter.
The increase in the company's earnings was primarily due to an
18.5% increase in operating profit in its Retail Pharmacy segment
that gained considerably from the
) contract termination. The increasing number of generic drugs
combined with the momentum in the Maintenance Choice program also
helped the company's bottom line.
Net revenue during the quarter increased 16.3% year over year to
$30.7 billion, missing the Zacks Consensus Estimate of $31.0
billion. The Pharmacy Services segment posted a robust 28.2%
increase in revenues to $18.4 billion during the reported quarter.
The company benefited from new activities associated with the
acquisition of the Medicare Part D business of
Universal American Corp
) last year, new client additions during the fiscal 2012 selling
season and drug cost inflation.
All these factors also led to a 13.7% year-over-year increase in
CVS' pharmacy network claims to 197.8 million. The new client
starts and the ongoing adoption of the Maintenance Choice program
also drove the Mail Choice claims processed growth by 15.5% to 20.5
Revenues from CVS' Retail Pharmacy increased 6.9% to $15.8
billion with same-store sales climbing 5.6%. Pharmacy same-store
sales during the quarter rose 7.2% on the heels of benefit obtained
from Walgreen's loss of the Express Scripts contract in January
2012. Front-end same-store sales increased 2.3% year over year.
Additionally, when 90-day scripts were counted as one script,
pharmacy same-store prescription volumes rose 7.7%. Converting
90-day scripts into 3 scripts, same-store prescription volumes
increased 9.8% year over year. Pharmacy same-store sales witnessed
a 500 basis point (bps) decline attributable to recent generic
The generic dispensing rate (the proportion of all generic
prescriptions to total number of prescriptions dispensed) in the
quarter increased 390 bps to 78.0% in the Pharmacy Services segment
and 350 bps to 79.1% in the Retail Pharmacy segment.
Gross margin during the quarter contracted 150 bps to 17.7%.
Operating expenses were up 3.9% on a year-over-year basis to $3.7
billion. However, operating margin remained flat year over year at
CVS exited the second quarter with cash and cash equivalents of
$1.82 billion, compared to $1.41 billion at the end of fiscal 2011.
Year-to-date net cash provided by operating activities were $4.0
billion compared to $3.1 billion for the same period last year.
During the second quarter, CVS opened 36 new retail drugstores,
closed 8 retail drugstores and 1 onsite pharmacy. Additionally, the
company relocated 24 retail drugstores. At the end of the quarter,
CVS operated 7,457 locations, including 7,381 retail drugstores, 28
onsite pharmacies, 31 retail specialty pharmacy stores, 12
specialty mail order pharmacies and 5 mail order pharmacies in 44
states, as well as the District of Columbia and Puerto Rico.
Anticipating a benefit of 5 cents per share related to the
prescription business to be retained from the contract loss of
Walgreen and Express Scripts, CVS raised its EPS outlook for fiscal
2012. The company now expects adjusted EPS of $3.32−$3.38 (earlier
guidance being $3.23−$3.33). The current Zacks Consensus Estimate
of $3.29 remains below the guidance range.
The company now expects the Retail Pharmacy's operating profit
to increase by 14%-15% (previous guidance being 10.5%-12.5%) while
that of the Pharmacy Services to increase by 13%-15% (11%-15%). The
company reiterated its 2012 free cash flow and cash flow from
operations guidance at $4.6-$4.9 billion and $6.2-$6.4 billion,
respectively. The fiscal 2012 guidance is based on the assumption
that the company's remaining $1.0 billion share repurchase
authorization will be completed by the end of fiscal 2012.
We are encouraged by the improved performance of CVS' Pharmacy
Services segment, mainly on account of significant new client wins
due to Walgreen retail contract loss. We strongly believe that the
company is well positioned to serve Express Scripts members with
access to pharmacy care and customer service.
However, earlier in July, the long-standing contractual dispute
between Walgreen and Express Scripts came to an end with both the
companies announcing a multi-year retail pharmacy network
agreement. Although CVS is still optimistic about retaining at
least 50% of the business gained from the dispute through the
fourth quarter 2012, we prefer to remain on the sidelines until
visibility improves in this regard.
This was not the end of the woes for CVS. The mega-merger
between Express Scripts and Medco Health Solutions in April this
year further intensified the competitive landscape in the PBM
industry and put CVS in a tight spot. Moreover, concerns linger
given the margin pressure felt by the company.
CVS currently retains a short-term Zacks #3 Rank (Hold). Over
the long term (3-6 months), we have a Neutral recommendation on the
CVS CAREMARK CP (CVS): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
UNIVL AMERICAN (UAM): Free Stock Analysis
WALGREEN CO (WAG): Free Stock Analysis Report
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