This summary is based on the second quarter fiscal 2007 earnings call conducted by CVS Caremark Corporation (CVS) on August 2, 2007.
Management:
Chief Executive Officer, President, Director: Thomas M. Ryan
CFO, Executive Vice President, Chief Administrative Officer: David B. Rickard
Vice President, Investor Relations: Nancy Christal
Key Investors Issues
- Earnings per share rose to 47 cents from 40 cents in prior year.
- Near-term aspects of the merger integration have been completed.
- The $5 billion share repurchase program expected to be concluded by year-end.
- A total of 65 new stores were opened during the quarter, with 275 planned for the year.
Second Quarter Highlights
Net earnings increased 114.1% to $723.6 million or 47 cents per share compared with $337.9 million or 40 cents per share in the comparable 2006 period.
Growth in earnings was driven by strong performance across both retail and pharmacy services segments with cost synergy opportunities and solid sales growth in the front store, pharmacy and PBM.
Total comparable sales were up 5.2%, with pharmacy comparable sales up 4.8%, despite being negatively impacted by about 720 basis points due to recent generic introductions.
The inclusion of the 2006 acquired stores had a 25 basis points negative impact on overall front-store comparable stores, 100 basis points negative impact on overall pharmacy comparable sales, and a 75 basis points negative impact on overall total comp.
Total revenues increased 96% to $20.7 billion, including $1.1 billion of inter-segment eliminations produced as a result of Caremark clients filling their prescriptions at CVS pharmacy stores.
- The retail pharmacy segment, which includes CVS pharmacy, Minute Clinic, and cvs.com, grew over 15% to $11.2 billion.
- The pharmacy services segment, which includes both Caremark and Pharmacare, grew well over 1,100% to $10.6 billion as measured against Pharmacare sales alone in 2006. The comparable PBM business grew by 2.3%.
Higher generic dispensing rates dampened top line growth with overall GDR at 59.6% compared to 54.2% in the prior year.
In the PBM business, net revenues were up 2.3% to almost $10.6 billion.
Overall generic dispensing rate rose to 59.6% on a comparable basis, an increase of 540 basis points over the prior year. Growth of PBM revenues on a comparable basis was driven by an increase in mail sales, especially within the specialty business. Overall mail penetration increased 40 basis points over 2006 to 28.2%. Total mail revenues were $4.2 billion, up 8%.
PBM retail revenues were $6.3 billion, which is down 1.1% from 2006. Retail claims decreased 1.3% compared to the same period last year, primarily due to the roll-off of contracts in the second-half of 2006 prior to the merger.
EBITDA for adjusted claim increased to $3.83 excluding merger costs, up 34% over 2006
With Medicare Part D, the firm serves 860,000 enrollees in 28 regions through Silver Script and the joint venture with Universal American. It also provides PBM services to 35 health plans for Medicare participants, which is close to another million lives.
By September 2007, the majority of Pharmacare’s contracts will be changed so that they should be recognized on a service revenue basis on a gross method.
The impact from this will be the addition of approximately $190 million in recorded third quarter revenues, the addition of $770 million in reported 2007 revenues, and about $2.3 billion in reported revenues annually. However, given a parallel increase in annual cost of goods sold during each period, there will be no impact on operating profit.
Overall gross profit margin decreased 640 basis points to 20.1%, reflecting the combination of the higher gross profit margin CVS Pharmacy business with the lower gross profit margin Caremark business.
Within the retail pharmacy segment, gross profit margin improved by 170 basis points.
The amount of generic drugs dispensed increased, with 62% of scripts dispensed as generics, up 450 basis points from 2006. The firm is reaping a larger portion of the purchasing synergies that made up the majority of the $500 million projected for full year 2008. In addition, front-store margins are up, largely due to reduced markdowns, reflecting continued benefits of the extra care card.
