Business Context and Reporting Period
Company: CVS Caremark Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended September 27, 2008
Business Overview: CVS Caremark is the largest provider of prescriptions in the United States, operating through two primary segments: Retail Pharmacy (6,347 stores and MinuteClinics) and Pharmacy Services (Caremark, providing PBM, mail order, and specialty pharmacy services). The company completed its merger with Caremark Rx, Inc. in March 2007.
Key Financial Metrics
| Metric (in millions) | 13 Weeks Ended Sep 27, 2008 | 39 Weeks Ended Sep 27, 2008 |
|---|---|---|
| Net Revenues | $20,863.4 | $63,329.7 |
| Gross Profit | $4,400.6 | $13,066.8 |
| Operating Profit | $1,466.2 | $4,314.4 |
| Net Earnings | $736.0 | $2,259.3 |
| Diluted EPS (Net Earnings) | $0.50 | $1.54 |
| Cash from Operating Activities | N/A | $2,178.3 |
| Cash and Cash Equivalents (End of Period) | $1,282.3 | $1,282.3 |
| Total Debt (Short-term + Long-term) | $9,726.9 | $9,726.9 |
Note: Total Debt calculated as Short-term debt ($982.0M) + Current portion of long-term debt ($697.4M) + Long-term debt ($8,047.5M).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased $368.2 million (1.8%) for the 13 weeks and $8.9 billion (16.4%) for the 39 weeks compared to the prior year. The 39-week increase was primarily driven by the inclusion of Caremark operations (273 days in 2008 vs. 192 days in 2007).
- Profitability: Earnings from continuing operations increased 18.8% for the 13 weeks and 31.2% for the 39 weeks. Gross profit margins improved due to higher utilization of generic drugs, which yield higher margins than brand-name drugs.
- Discontinued Operations: A loss of $131.5 million was recorded for the 39 weeks ended September 27, 2008, related to lease guarantees for former subsidiary Linens 'n Things following its Chapter 11 bankruptcy filing and expected liquidation.
- Segment Performance:
- Retail Pharmacy: Same-store sales increased 3.7% (13 weeks) and 3.6% (39 weeks). Generic dispensing rates rose to 68.0% (13 weeks) and 67.2% (39 weeks).
- Pharmacy Services: Revenue increased significantly due to the Caremark merger and accounting changes (gross vs. net method) for retail network contracts. Mail service claims decreased due to the termination of the Federal Employees Health Benefit Plan (FEP) contract.
Guidance, Outlook, and Risks
- Acquisition Activity: On August 12, 2008, the company announced an agreement to acquire Longs Drug Stores Corporation for approximately $2.9 billion. The acquisition was completed on October 30, 2008. In anticipation of this deal, the company delayed its $2.0 billion share repurchase program, intending to resume it in the second half of 2009.
- Dividends: The Board authorized a 15% increase in the quarterly common stock dividend to $0.069 per share in July 2008.
- Legal and Regulatory Risks:
- Linens 'n Things: The company faces potential obligations for approximately 220 store lease guarantees. While an initial estimate of $131.5 million was recorded, final amounts may vary as leases are resolved.
- Qui Tam Litigation: Caremark is a defendant in a False Claims Act lawsuit regarding Medicaid processing. Recent court rulings were favorable to Caremark, but the case remains active with appeals pending.
- Antitrust: The company is involved in multidistrict litigation regarding antitrust laws in pharmacy networks.
- Market Risks: The company faces pressure from third-party payors to reduce reimbursement rates, particularly for generic drugs. It also faces risks related to the implementation of the Deficit Reduction Act (DRA) regarding Medicaid reimbursement formulas.
Investor Verification Checklist
- Longs Acquisition Integration: Verify the timeline and financial impact of integrating Longs Drug Stores (521 stores) and Rx America into CVS operations.
- Linens 'n Things Liability: Monitor updates on the liquidation of Linens 'n Things to assess if the recorded $131.5 million loss for lease guarantees will increase.
- Generic Drug Margins: Track the balance between rising generic dispensing rates (which boost gross profit margins) and potential reimbursement rate cuts from payors.
- Share Repurchase Program: Confirm the resumption of the $2.0 billion share repurchase program in late 2009 as planned.
- Legal Proceedings: Review developments in the Caremark False Claims Act lawsuit and the Lauriello class action lawsuit seeking $3.2 billion in damages.