CVS Caremark execs bullish after strong 3Q

WOONSOCKET, R.I. — Coming off a strong third quarter, CVS Caremark executives expressed confidence that the company’s integrated retail/pharmacy benefit manager model and the unique programs and services it is able to deliver customers and clients are “making the difference,” president and CEO Larry Merlo told analysts during a Tuesday morning earnings call.

The results have been strong revenue growth on both sides of the enterprise, Merlo noted, with sales in its pharmacy services business up 22.2% to $18.1 billion for the third quarter ended Sept. 30, and sales in its stores up 5.5% to $15.5 billion. As a result of over-performing its expectations in the quarter — and also its increased optimism that it would retain a greater percentage than originally expected of Express Scripts patients in the aftermath of the now-settled, Walgreens-ESI dispute — Merlo told analysts the company raised and narrowed its earnings guidance for the year, from $3.38 per share to $3.41.

In the stores, comparable sales rose 4.3%, with pharmacy comps up 5.3% during the quarter, driven by strong prescription growth. Script volumes rose 8.7% when 90-day prescriptions were counted as one script, and up 11.1% when counted as three. Merlo attributed the growth to “healthy underlying growth in key drug classes,” and certain market fundamentals that impact the entire industry, including an uptick in physician visits, continued growth of Medicare Part D and greater use of maintenance medications driven by greater use of generics.

But Merlo also noted that a substantial chunk of that had come from ESI patients that had come over from Walgreens, which produced a bump of 400 to 430 basis points — or roughly 6.5 million to 7 million scripts during the quarter. Importantly, the lift also came on the front-end of its business, where former Walgreens-ESI patients contributed 150 basis points to front-end comparable sales, which were up 2.2% during the quarter. In all, Merlo said the company now expects that it will be able to retain as much as 60% of the former Walgreens-ESI patients in the fourth quarter, up from its previous guidance of 50% following its second-quarter results.

"We are encouraged by the increased confidence in script retention, and we believe the stock will be up today despite cautious 2013 commentary from [Express Scripts] after market close yesterday," Citigroup analyst Deborah Weinswig wrote in a Nov. 6 research note. In a late Monday call with analysts, Express Scripts CEO George Paz noted that concerns about the economy were weighing on his company's performance.

Merlo noted that MinuteClinic revenues grew 43% during the quarter, and the company added 25 new clinics for a total of 609 as of Sept. 30.

ExtraCare, the company’s industry-leading loyalty program, also continues to contribute significantly to sales in the retail business. Merlo described the program not as a “customer acquisition tool” but more so as a highly effective “customer retention tool,” noting that the program had delivered some $2.7 billion in value to ExtraCare cardholders to date in 2012. CVS/pharmacy president Mark Cosby described the program, with some 70 million active cardholders, as “a huge piece of our past and a big part of our future.”

In particular, Cosby noted the growth of its ExtraCare Beauty Club program — now in its second year and numbering some 10 million participants — and its continual digitization efforts as two key ways in which the company continues to create more personalized offers and communications via ExtraCare.

Looking ahead, Merlo noted during the Election Day call that regardless of the outcome of the presidential race, the company is well-positioned to take advantage regardless of the direction healthcare reform inevitably takes in the months and years ahead.