Business

Aug 6, 2013 5:20 PM by Juice Godfrey

CVS Caremark's 2Q profit climbs 16 percent

CVS Caremark Corp.'s second-quarter earnings jumped 16 percent, as the drug store operator and pharmacy benefits manager continued to reap bottom-line gains from generic drugs.

But the Woonsocket, R.I., company's shares slid Tuesday afternoon after it also dropped the top end of its 2013 earnings forecast a penny below the Wall Street consensus due to a delay in share buybacks, which can boost earnings per share by lowering the share count.

CVS Caremark now expects 2013 adjusted earnings of $3.90 to $3.96 per share compared to its previous forecast for $3.89 to $4 per share. Analysts expect $3.97 per share, on average, according to FactSet.

BMO Capital Markets analyst Jennifer Lynch called the new guidance "mildly disappointing," and Morningstar analyst Vishnu Lekraj noted that, as a rule of thumb, investors generally dislike lower forecasts. But he also said some may be selling CVS shares to capture profits.

The stock had advanced about 27 percent so far this year through Monday and had set several all-time high prices earlier this summer.

Its shares fell $1.73, or 2.8 percent, to $59.89 in trading Tuesday.

CVS Caremark runs the nation's second-largest drugstore chain, with more than 7,500 stores. Its Caremark unit also is one of the nation's largest pharmacy benefits managers, or PBMs.

PBMs run prescription drug plans for employers, insurers and other customers. They process mail-order prescriptions and handle bills for prescriptions filled at retail pharmacies.

CVS said it adjusted its guidance because it temporarily halted share buybacks in the second quarter while it negotiated with the Securities and Exchange Commission. The company said last week it will pay $20 million to resolve an investigation into some public disclosures and securities deals involving employees, among other items.

The buyback delay basically means the company's average share count for the year will be higher than it had anticipated. That resulted in a lower top end for the guidance range.

CVS executives also told analysts Tuesday morning that enrollment in their SilverScript Medicare prescription drug coverage could sink for next year due to sanctions imposed by the Centers for Medicaid and Medicare Services, or CMS.

CMS suspended enrollment and marketing for the plan earlier this year. CVS initially thought it could resolve the case and have the sanctions lifted in time for open enrollment later this year, the annual window in which customers can sign up for coverage. But it now says that resolution could be delayed, and its enrollment could drop to 3.1 million people from nearly 3.5 million.

Gabelli Funds Portfolio Manager Jeff Jonas said that delay was a surprise, but it amounted to a "small negative." Overall, he said he saw some strong metrics behind the company's second-quarter performance.

In the quarter, CVS Caremark earned $1.12 billion, or 91 cents per share. That compares with net income of $966 million, or 75 cents per share, a year ago. Adjusted earnings totaled 97 cents per share, a penny higher than average analyst expectations.

Revenue rose about 2 percent to $31.25 billion, while analysts expected $31.14 billion.

CVS Caremark said new generic drugs significantly improved its operating profit in both its drugstore and pharmacy benefits business segments.

Drugstore operators and pharmacy benefits managers have benefited from an influx of patent expirations for brand-name drugs for several quarters now. This exposes those drugs to cheaper generic competition. Those generics then help drugstore or PBM profitability because they provide a wider margin between what it costs for the pharmacy to purchase the drugs and the reimbursement received.

However, generics also can hurt drugstore and PBM revenue.

CVS Caremark said its retail pharmacy revenue climbed about 2 percent to $16.14 billion, while revenue from its PBM side rose 2 percent to $18.8 billion. Generic drugs restrained revenue growth compared to last year, when the company also saw a gain from the Easter holiday, which fell in April as opposed to the first quarter of this year.

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