CVS Caremark net revenues increase 6.3% to $32.7 billion in Q1 2014

CVS Caremark CorporationMay 2 2014

CVS Caremark Corporation (NYSE: CVS) today announced operating results for the three months ended March 31, 2014.

First Quarter Year-over-year Highlights:

• Operating profit increased 19.5% to approximately $2.0 billion
• Adjusted EPS increased 22.5% to $1.02, while GAAP diluted EPS from continuing operations increased 23.3% to $0.95
• Retail Pharmacy Segment same store prescription volumes increased 2.1% on a 30-day equivalent basis
• Retail Pharmacy Segment same store sales increased 1.4%
• Generated free cash flow of $1.8 billion; cash flow from operations of $2.2 billion

2014 Guidance Confirmed:

• Confirmed full-year Adjusted EPS range of $4.36 to $4.50 and GAAP diluted EPS from continuing operations range to $4.09 to $4.23
• Provided second quarter Adjusted EPS guidance of $1.08 to $1.11 and GAAP diluted EPS from continuing operations guidance of $1.01 to $1.04
• Confirmed full year free cash flow at $5.5 to $5.8 billion; cash flow from operations at $7.0 to $7.3 billion

Revenues

Net revenues for the three months ended March 31, 2014, increased 6.3%, or approximately $1.9 billion, to $32.7 billion compared to the three months ended March 31, 2013.

Revenues in the Pharmacy Services Segment increased 10.3%, or $1.9 billion, to $20.2 billion in the three months ended March 31, 2014. The increase was primarily driven by growth in our specialty pharmacy business, including the acquisition of Coram, as well as drug cost inflation, new clients and new products. Pharmacy network claims processed during the three months ended March 31, 2014 increased 0.4% to 208.0 million, compared to 207.1 million in the first quarter of last year. The increase in the pharmacy network claim volume was primarily due to new client starts. Mail choice claims processed during the three months ended March 31, 2014, decreased 3.6% to 19.8 million, compared to 20.5 million in the prior year. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in our Maintenance Choice program.

Revenues in the Retail Pharmacy Segment increased 2.7%, or $441 million, to $16.5 billion in the three months ended March 31, 2014. Same store sales increased 1.4% versus the first quarter of last year, with pharmacy same store sales up 3.8% and front store same store sales down 3.8%. Pharmacy same store prescription volumes rose 2.1% on a 30-day equivalent basis. Both front store same store sales and pharmacy same store sales were negatively impacted by a weaker flu season in the three months ended March 31, 2014 and severe weather across much of the United States, compared to the prior year. The Company estimates that the extreme weather experienced this year along with the comparison against last year's strong flu season resulted in a negative impact to pharmacy same store prescription volumes of 180 to 200 basis points. Front store same store sales were also negatively impacted by approximately 80 basis points from the shift of Easter from March in 2013 to April in 2014, as well as softer customer traffic. The Company estimates that the extreme weather experienced this year along with the comparison against last year's strong flu season resulted in a negative impact of 140 to 160 basis points to front store same store sales. Despite the decline in front store same store sales, front store basket size improved modestly while front store margins improved notably during the quarter. The increase in total same store sales was primarily driven by the growth of prescription volumes and brand name drug cost inflation. Pharmacy same store sales include a negative impact of approximately 120 basis points from recent generic drug introductions.

For the three months ended March 31, 2014, the generic dispensing rate increased approximately 190 basis points in the Pharmacy Services Segment, to 82.4%, and approximately 170 basis points in the Retail Pharmacy Segment, to 82.9%, compared to the prior year.

Net Income

Net income for the three months ended March 31, 2014, increased 18.3%, or approximately $175 million, to $1.1 billion, compared with approximately $1.0 billion during the three months ended March 31, 2013. The Pharmacy Services and Retail Pharmacy segments both benefited from the impact of increased generic drugs dispensed and slower growth in expenses. Net income was also positively impacted by rebate improvement in the Pharmacy Services Segment and an increase in front store gross margins in the Retail Pharmacy Segment. Adjusted earnings per share (Adjusted EPS) for the three months ended March 31, 2014 and 2013, was $1.02 and $0.83, respectively, an increase of 22.5%. Adjusted EPS in the three months ended March 31, excludes $131 million and $122 million in 2014 and 2013, respectively, of intangible asset amortization related to acquisition activity. GAAP earnings per diluted share for the three months ended March 31, 2014 and 2013, was $0.95 and $0.77, respectively, an increase of 23.3%.

President and Chief Executive Officer Larry Merlo stated, "We once again posted a very strong quarter, with solid results across the enterprise. Adjusted EPS increased 22.5%, to $1.02, which was a penny below our expectations primarily due to the significant amount of unforeseen weather-related issues we experienced throughout the quarter. I'm particularly pleased with the exceptional growth in the PBM, especially the growth of the specialty pharmacy business. Additionally, with the substantial amount of free cash we generated during the quarter, we remain confident in our ability to achieve our 2014 goals."

Guidance

The Company confirmed its earnings guidance range for the full year 2014. The Company expects to deliver Adjusted EPS of $4.36 to $4.50 and GAAP diluted EPS from continuing operations of $4.09 to $4.23 in 2014. The Company also continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, and 2014 cash flow from operations guidance of $7.0 billion to $7.3 billion. The Company expects to deliver Adjusted EPS of $1.08 to $1.11 and GAAP diluted EPS from continuing operations of $1.01 to $1.04 in the second quarter of 2014.

Real Estate Program

During the three months ended March 31, 2014, the Company opened 22 new retail drugstores, and closed seven retail drugstores, one specialty retail pharmacy and one infusion branch. In addition, the Company relocated nine retail drugstores. As of March 31, 2014, the Company operated 7,829 locations in 47 states, the District of Columbia, Puerto Rico and Brazil. These locations included 7,675 retail drugstores, 17 onsite pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.