CVS Caremark 1Q profit falls on margins, costs

AP News
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Posted: May 05, 2011 1:57 PM
CVS Caremark 1Q profit falls on margins, costs

CVS Caremark Corp. said Thursday that its first-quarter net income fell nearly 8 percent as its pharmacy benefits management business continued to report lower profits.

The company said it expects Caremark's results to start to improve in 2012, when it will reap the benefits of a wave of profitable and low-cost generic drugs. In his first conference call as the CEO, Larry Merlo defended CVS Caremark's business model, which has faced criticism from some shareholders as well as scrutiny from competitors and regulators.

"Despite conjecture in the marketplace, there are no plans to split up the company," he said. "Breaking up the company would be a step in the wrong direction for plan members, retail customers, and certainly our payors."

Merlo, who became CEO in March when Thomas Ryan retired, also said accusations that Caremark improperly steers business to CVS stores are "false, unfounded, and misleading."

Critics have said CVS's benefit plans reduce choice for plan members and that the company faces a conflict of interest, as its drugstores get revenue from filling prescriptions and the pharmacy benefits unit tries to reduce costs for its plan sponsors and beneficiaries.

Profits at the Caremark pharmacy benefits management business fell because of costs connected to a new contract with Aetna Inc. The 12-year deal went into effect Jan. 1 and Caremark's programs are being gradually phased in. The company also reported lower drug prices from a contract with the Federal Employee Health Benefit Plan, a union of government employees.

The company has previously said those issues will reduce Caremark's profit this year. Caremark's profit also declined in 2010.

The Woonsocket, R.I., company said its profit fell to $713 million, or 52 cents per share, in the quarter ended in March, from $771 million, or 55 cents per share. Its revenue grew 9 percent to $25.88 billion from $23.76 billion.

Excluding acquisition and other charges, the company said it earned 57 cents per share. FactSet said analysts expected a profit of 55 cents per share and $25.76 billion in revenue.

Revenue from the company's retail stores rose 4.4 percent to $14.6 billion, while revenue at stores open at least a year rose 2.6 percent. Revenue from Caremark rose 18.4 percent to $14 billion with the addition of the Aetna contract. About $2.7 billion in revenue is counted for both businesses.

The company opened 57 stores during the quarter and closed 13, giving it a total of 7,226. CVS is the second-largest drugstore chain in the country behind Walgreen Co., which has about 7,700 stores.

CVS Caremark maintained its annual profit guidance, saying it expects to earn between $2.72 and $2.82 per share excluding one-time items and discontinued operations. Analysts expect $2.77 per share.

The company expects to earn 63 to 65 cents per share in the second quarter and forecast revenue will grow 10 to 12 percent, which implies a total of $26.41 billion to $26.89 billion. The company said revenue from the retail and pharmacy benefits management businesses will both grow, but Caremark's profit will decline by about a quarter from the same period in 2010.

Analysts expect an adjusted profit of 64 cents per share and $26.39 billion on average.

CVS Caremark shares rose 51 cents to $36.63 in afternoon trading.

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Associated Press Writer Damian Troise contributed to this story from New York.