CVS Caremark’s 1st-quarter profit climbs 9 pct; Walgreen contract dispute helps business

CVS Caremark Corp. gained millions of new prescriptions in the first quarter due to a contract impasse between two rivals, and now the drugstore chain wants to keep the growth going by ensuring that those customers stick around and use the rest of its store.

The Woonsocket, R.I., company said Wednesday its first-quarter earnings climbed 9 per cent, and it raised its profit forecast for 2012 because the end of a contract between Walgreen Co. and Express Scripts Inc. prompted Walgreen customers to migrate to CVS stores. Walgreen, the nation’s largest drugstore chain stopped filling prescriptions for Express Scripts, the biggest pharmacy benefits manager, at the end of 2011, when a contract between the two companies ran out.

CEO Larry Merlo estimates that his company filled about 5.7 million to 6.5 million additional prescriptions in the first quarter due to Walgreen-Express Scripts dispute, which added about 3 cents per share to his company’s earnings. All told, CVS Caremark filled more than 179 million prescriptions at its retail pharmacies in the first three months of 2012.

Merlo said his company focused first on making the Walgreen-to-CVS switch as smooth as possible for pharmacy customers. Now they want that customer to start using the front-end, or the rest of its stores. CVS Caremark predicts another gain of between 3 cents and 4 cents per share for its second quarter earnings, assuming Walgreen and Express Scripts don’t start doing business again.

Even if that happens, the new customers CVS snared will likely stick around, analyst Dave Shove said in a research note. He covers drugstores for BMO Capital Markets.

“We suspect that sales will continue to benefit throughout the year, with or without a resolution by the companies,” Shove wrote.

In the first quarter, CVS Caremark earned $776 million, or 59 cents per share. That compares with $713 million, or 52 cents per share, in last year’s quarter. Revenue rose 20 per cent to $30.8 billion.

Adjusted earnings were 65 cents per share. Analysts surveyed by FactSet expected, on average, earnings of 62 cents per share on $30.3 billion in revenue.

CVS Caremark runs a pharmacy benefits management business and is the second-largest U.S. drugstore chain after Walgreen. CVS operated 7,352 retail drugstores at the end of March.

CVS said revenue at stores open at least a year climbed more than 8 per cent. Pharmacy sales grew nearly 10 per cent, even though a weak flu season hurt business and the introduction of some generic drugs pinched revenue. An earlier-than-expected start to the allergy season partially offset those factors, and an extra day in the quarter caused by the leap year helped sales.

Revenue at stores open at least a year is a key indicator of a retailer’s health because it excludes the impact of recently opened or closed stores.

Revenue from the company’s Caremark pharmacy benefits management, or PBM, segment climbed 32 per cent to $18.3 billion, mainly because of business gained from the acquisition of Universal American Corp.’s Medicare prescription drug business.

PBMs run prescription drug plans for employers, insurers and other customers. They use large purchasing power to negotiate lower drug prices and make money by reducing costs for health plan sponsors and members.

CVS Caremark now expects 2012 adjusted earnings to range between $3.23 and $3.33 per share. That’s up from a previous forecast of $3.18 to $3.28 per share. Analysts expect, on average, 2012 earnings of $3.29 per share. Company officials said they don’t include a gain from the Walgreen situation beyond the second quarter because the situation is fluid.

Company shares climbed 2.7 per cent, or $1.21 cents, to close at $45.92 Wednesday, while the Standard & Poor’s 500 index fell slightly.