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CVS Caremark 4th-Quarter Profit Up 2.6% on Higher Sales

02/06/2013 | 11:11am US/Eastern
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--Debt refinancing costs weigh on bottom line, but sales broadly higher

--PBM, retail sales each rise, helping CVS report better-than-expected results

--Purchased Brazil drugstore chain Drogaria Onofre last week

(Updates with details about an acquisition and other comments made during a conference call, beginning in the seventh paragraph.)

 
   By John Kell 
 

CVS Caremark Corp.'s (>> CVS Caremark Corporation) fourth-quarter earnings rose 2.6% as debt refinancing costs weighed on the bottom line, somewhat masking a strong performance for the company's pharmacy-benefits-management business and higher retail sales.

The drugstore retailer and PBM has now reported better-than-expected adjusted earnings for four consecutive quarters. Results in the fourth quarter were led by the PBM business, which saw revenue rise 17% to $18.6 billion, aided by new clients added to the network during the 2012 PBM selling season, higher drug costs and growth in the Medicare Part D program.

On the retail side, the top line jumped 5.1% to $16.3 billion as same-store sales grew 4%, growth that exceeds the monthly sales data posted by rivals Walgreen Co. (>> Walgreen Company) and Rite Aid Corp. (>> Rite Aid Corporation) in late 2012. Prescription volume growth was healthy, aided by client wins after Walgreen's contract dispute last year with fellow PBM Express Scripts Holding Co. (>> Express Scripts Holding Co) and stronger demand for flu-related prescriptions.

But CVS said pharmacy same-store sales were stung by higher usage of low-priced generics, which hurts the top line for drug store chains, though those products have a mixed benefit as they command higher margins.

An active flu season has helped drugstore chains somewhat mitigate the top-line dent caused by higher generic penetration, as consumers seek out vaccinations, order prescriptions and buy over-the-counter cough-and-cold medications. CVS Chief Executive Larry Merlo told Dow Jones Newswires that the company saw a "significant uptick" in flu activity by mid-December and strong demand through most of January.

Mr. Merlo said over the past two weeks, CVS has seen the severity of flu cases moderate. Still, the company has administered about 4.8 million flu shots so far this season, above last year's level.

In a conference call with analysts, CVS disclosed it purchased Brazil drugstore chain Drogaria Onofre last week, though no price tag was disclosed as CVS called the deal "not financially material."

CVS will acquire 44 locations through the deal, the company's first acquisition abroad. The purchase comes more than six months after Walgreen agreed to spend $6.7 billion to buy a 45% stake in European pharmacy operator Alliance Boots.

CVS said it views Brazil as an attractive market, saying that region's health-care and pharmacy segments should grow in double digits for the next decade.

Overall, CVS reported a profit of $1.13 billion, or 90 cents a share, up from $1.1 billion, or 81 cents a share, a year earlier. Excluding debt-related costs and other items, adjusted earnings from continuing operations were $1.14 in the latest quarter. Revenue increased 11% to $31.39 billion.

Analysts polled by Thomson Reuters most recently projected earnings of $1.10 on revenue of $31.13 billion.

Gross margin expanded to 20.1% from 19.6%.

For the year, CVS now sees adjusted earnings from continuing operations of $3.86 to $4, a view that was lifted by two cents to reflect the debt refinancing.

CVS will face some lofty comparisons in 2013, due to strong demand for generics, particularly in the first half of the year. And after Walgreen inked a contract agreement with Express Scripts starting in September, the company has had some success winning back some customers it lost to competitors during the months-long spat, resulting in some lost business for CVS.

Walgreen has sought to strengthen its core business with its new loyalty-card program and by selling more private-label offerings. CVS on Wednesday indicated it is staying focused on retaining customer loyalty by launching more targeted promotions and e-mail offers.

CVS last week launched a pharmacy rewards program to promote retention and better prescription adherence. CVS has also doubled the amount of e-mails it sends and is seeing greater interest in the beauty-product deals it offers. Overall, CVS posted a 19% jump in the amount of offers redeemed by consumers last year.

CVS shares were down 0.2% to $51.61 in recent trading. The stock is up 6.7% in 2013.

 
  --Tess Stynes contributed to this article 

Write to John Kell at john.kell@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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