Business Context and Reporting Period
Company: CVS Caremark Corporation (formerly CVS Corporation)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008 (368 days due to a change in fiscal year-end from the Saturday nearest December 31 to December 31).
Business Overview: The Company is the largest provider of prescriptions and related health care services in the United States, operating two primary segments: Pharmacy Services (PBM, mail order, specialty pharmacy) and Retail Pharmacy (CVS/pharmacy and Longs Drug stores). The Company manages over one billion prescriptions annually.
Key Developments:
- Caremark Merger: Completed in March 2007, integrating pharmacy benefit management with retail operations.
- Longs Acquisition: Closed on October 20, 2008, acquiring 529 retail drug stores and RxAmerica LLC.
- Store Count: Ended 2008 with 6,923 retail drugstores, 58 specialty pharmacy stores, and 19 specialty mail order pharmacies.
Key Financial Metrics
| Metric (in millions, except per share) | 2008 | 2007 |
|---|---|---|
| Net Revenues | $87,471.9 | $76,329.5 |
| Gross Profit | $18,290.4 | $16,107.7 |
| Operating Profit | $6,046.2 | $4,793.3 |
| Net Earnings | $3,212.1 | $2,637.0 |
| Diluted EPS (Net Earnings) | $2.18 | $1.92 |
| Total Assets | $60,959.9 | $54,721.9 |
| Long-term Debt | $8,057.2 | $8,349.7 |
| Total Shareholders' Equity | $34,574.4 | $31,321.9 |
Revenue Composition (2008): Prescription drugs (68%), Over-the-counter and personal care (13%), Beauty/cosmetics (4%), General merchandise and other (15%).
Dividends: Total cash dividends per common share for 2008 were $0.25800.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased by approximately 14.6% ($11.1 billion) compared to 2007, driven by the Longs Acquisition and organic growth.
- Profitability: Operating profit increased by 26.1% ($1.25 billion) and Net Earnings increased by 21.8% ($575.1 million).
- Discontinued Operations: The 2008 results include a loss from discontinued operations of $132.0 million (net of tax benefit) related to lease guarantees for former Linens 'n Things stores, which filed for Chapter 11 bankruptcy in May 2008. No such loss was recorded in 2007.
- Debt: Long-term debt decreased slightly by $292.5 million year-over-year.
- Store Expansion: The Company opened 188 new retail stores and acquired 529 stores (Longs) in 2008, increasing the total store count from 6,301 to 6,923.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
- Store Development: The Company expects to open between 250 and 300 new or relocated stores in 2009.
- Share Repurchases: A $2.0 billion share repurchase program authorized in May 2008 was delayed due to the Longs Acquisition. The Company intends to complete the program in the second half of fiscal 2009.
- Technology: Plans to implement a new pharmacy fulfillment system (Rx Connect) in 2009.
Management Commentary: Management highlighted the success of the Caremark Merger in achieving synergies and the strategic value of the Longs Acquisition. The Company introduced "Proactive Pharmacy Care" programs to improve health outcomes and lower costs.
Risks and Contingencies:
- Regulatory Environment: Significant exposure to federal and state regulations regarding Medicare Part D, Medicaid reimbursement, anti-remuneration laws, and privacy (HIPAA). Changes in reimbursement formulas (e.g., AWP, ASP) could materially impact profitability.
- Legal Proceedings: The Company is involved in various litigation, including a qui tam lawsuit regarding Medicaid claims processing (favorable rulings in August 2008), antitrust litigation regarding pharmacy networks, and a class action lawsuit regarding insurance coverage settlements.
- Economic Conditions: The 2008 economic recession resulted in declining drug utilization trends, which could dampen demand for pharmacy services and retail products.
- Integration Risks: Risks associated with realizing the full benefits of the Caremark Merger and integrating the Longs Acquisition.
Investor Verification Checklist
- Linens 'n Things Liability: Verify the final settlement amount for the $132.0 million loss from discontinued operations related to lease guarantees.
- Longs Integration: Monitor the successful integration of the 529 acquired Longs Drug stores and RxAmerica assets into CVS systems.
- Reimbursement Trends: Track changes in Medicaid and Medicare Part D reimbursement rates and the impact of AWP/ASP pricing benchmark adjustments.
- Share Repurchase Execution: Confirm the timing and volume of share repurchases in the second half of 2009 as planned.
- Regulatory Compliance: Review outcomes of ongoing government investigations (OIG, FTC) and the impact of new privacy and anti-fraud regulations.
- Generic Drug Margins: Assess the impact of increased generic drug utilization on gross profit margins in both retail and PBM segments.