CVS Caremark said Thursday its profit slipped 1 percent in the second quarter as its pharmacy benefits management business weathered lower prices on contract renewals.
The Woonsocket, R.I., company said Caremark faced lower prices related to contract renewals. The most significant of those was its retail pharmacy contract with the Federal Employee Health Benefit Program, which the company renewed in the third quarter of 2010. While those renewals cut into its profit, total revenue for CVS Caremark rose 10.9 percent to $14.57 billion as the company began a new 12-year contract with Aetna Inc. and acquired Universal American Corp.'s Medicare Part D business.
Caremark's results have also been hurt by continued declines in prescription drug use, which mostly affect medications for chronic ailments. Prescriptions have slumped since early 2010 because Americans have cut back on doctors' visits and tried to make their prescriptions last longer. The company said it now expects a slightly bigger decline in Caremark's annual profit because of those cutbacks.
CVS Caremark Corp.'s second-quarter profit declined to $816 million from $821 million a year ago. On a per-share basis it was unchanged at 60 cents. Excluding one-time items, the company earned 65 cents per share. Revenue rose 11 percent to $26.63 billion from $24.01 billion.
Analysts surveyed by FactSet expected a profit of 64 cents per share and revenue of $26.76 billion in revenue, on average. Shares of CVS Caremark fell $2.21, or 6.1 percent, to $34 amid a broader market sell-off.
In a note to clients, Citi Investment Research analyst Deborah Weinswig said the company's earnings per share were bolstered by larger-than-expected stock repurchases.
While Caremark's profit fell in 2010 and is expected to fall this year, the company continues to forecast improvement in 2012. The purchase of the Universal American business will give it about $5.5 billion in revenue next year. The company said during a conference call it has kept 98 percent of its clients whose contracts are up for renewal in 2012, and it expects $4.8 billion from new or expanded contracts with the federal employee program, with California government employees, and the state of Hawaii, among other clients.
The company handled 174 million claims, up almost 36 percent from last year, and filled 17.8 million claims through the mail, 11 percent more than last year. It lowered its estimate for Caremark's total claims by about 5 million. The company closed the Universal American acquisition earlier than expected, which will help offset the decrease in prescribing.
Revenue from CVS drugstores grew 3.6 percent to $14.83 billion. Sales at stores open at least a year grew 2 percent, with pharmacy revenue up 2.6 percent and front-end revenue up 0.8 percent. Sales at stores open at least a year are considered a key measurement of retailer health because they exclude results from stores that have opened or closed within the last year.
CVS opened 41 stores during the second quarter and operated 7,266 retail drugstores at the end of the period. CVS is the second-largest U.S. drugstore chain behind Walgreen Co., which has more than 7,700 stores.
Walgreen has said that it won't participate in networks run by pharmacy benefits manager Express Scripts Inc. after this year. CVS Chief Financial Officer Dave Denton said it's hard to tell precisely how that would affect the company's business, but he said CVS and other pharmacies and chains would benefit. He said CVS has good relationships with all the health plan sponsors it works with.
Denton said it's too soon to say how CVS' 2012 business will be affected by the proposed merger of its two biggest competitors, Express Scripts and Medco Health Solutions Inc. Last month Express Scripts agreed to buy Medco for $29.1 billion in cash and stock.
The company narrowed its adjusted profit forecast and said it now expects to earn between $2.75 and $2.81 per share in 2011. Its previous estimate called for a profit of $2.72 to $2.82 per share. Analysts expect CVS to earn $2.78 per share.
For the third quarter, CVS forecast an adjusted profit of 66 to 68 cents per share, while analysts expect 68 cents per share.