CVS Caremark’s fourth-quarter results came in at the high end of expectations and helped produce a record year; however, one of the key topics analysts discussed was the company’s recent decision to stop selling tobacco products in all its stores by Oct. 1.
“Last week we announced our decision to exit the tobacco category, a category that we believe is inconsistent with our growing role in the changing healthcare marketplace,” Larry Merlo, president and CEO, told analysts. “Simply put, this was the right decision at the right time. There is a far greater focus emerging on health outcomes, managing chronic disease and reducing costs, and exiting the tobacco category more closely aligns us with the goals of patients, clients and providers, positioning our company for future growth.”
Merlo made note of the overwhelmingly positive response across an array of key constituents, including customers, prospective and current clients, benefit consultants, legislators and policymakers, and public health and Medicaid officials.
“All of whom see the health benefits, as well as the role that pharmacy can play in advancing smoking cessation and better managing chronic disease,” Merlo said.
As reported, the move is expected to result in a loss of approximately $2 billion in revenues on an annual basis from the tobacco shopper. The $2 billion represents about 3% of earnings.
“When you look at that eight feet to 10 feet that tobacco commands today, there will be something replacing that space, and to be clear, it is not going to make up $2 billion in revenues, but it will be something. And there are some things that are being tested as we speak,” Merlo said when asked about its plans at retail and the steps it would take to help offset some of the loss.
“We are seeing this tobacco decision as an opportunity to connect even more consumers as an expert in health and beauty and to build our loyalty with them. As we focus specifically on the front store, it is really around driving what we will call ‘smart growth’ and I think there it has three elements: taking ExtraCare to the next level, the second is focusing on our core strength in health and beauty, and the third is driving our store brand penetration,” added Helena Foulkes, president of CVS/pharmacy.
During the quarterly call with analysts, Merlo also provided analysts with a broad-reaching business update including:
- The impact of the Affordable Care Act and the role CVS Caremark can play in serving new customers and supporting health plans;
- Its joint venture with Cardinal Health to form the largest generic sourcing entity in the United States. The venture will help spur innovative purchasing strategies with generic manufacturers and is expected to be operational by July;
- The 2014 selling season, which has resulted in net-new wins of about $2 billion, excluding attrition in the Med D business. Merlo said that while it is too early to provide an update on the 2015 selling season, the company is “well-positioned” to both retain business and gain share; and
- The specialty pharmacy business, which posted a revenue increase of about 22% year over year.
Merlo added that the company expects to see significant growth in the specialty space and is well-positioned to capitalize on the opportunity. Enter its acquisition in January of Coram, the specialty infusion services and enteral nutrition business unit of Apria Healthcare Group.
“This provides us with a new set of capabilities to manage not just the cost of infused drugs, but also to reduce the length of hospital stays and to help patients move from higher cost sites of service, like hospital outpatient centers, to more cost-effective locations, such as the patient's home or a physician’s office,” Merlo said.
Furthermore, its new Specialty Connect offering is on schedule to roll out in 2014. Analogous to the Maintenance Choice program, Specialty Connect integrates mail and retail capabilities to provide both greater choice and convenience for members.
CVS Caremark's MinuteClinic business, which posted a revenue increase of more than 10% during the quarter and reached a milestone with 800 total clinics in 28 states and Washington, D.C.
Net revenues for the three months ended Dec. 31 increased 4.6%, or $1.4 billion to $32.8 billion, up from $31.4 billion the year-ago period. For the year, total revenue rose 3% to $126.8 billion compared with $123.1 billion last year.
Revenues in the pharmacy services segment increased 5.2% to $19.6 billion during the quarter. This increase was primarily associated with drug cost inflation, new products and new clients in the specialty pharmacy business, the company stated. For the year, total revenue in the pharmacy services segment increased 3.8% to $76.2 billion
Revenues in the retail pharmacy segment increased 5.6% to $17.2 billion during the quarter. Same-store sales rose 4%, with pharmacy same-store sales up 6.8%. Front-end same-store sales decreased 1.9% due to softer traffic, which was partially offset by an increase in basket size, the company stated. For the year, total revenue in the retail pharmacy segment rose 3.1% to $65.6 billion. Same-store sales increased 1.7% for the year, with pharmacy same-store sales up 2.6% and front-end, same-store sales down 0.5%.
Income from continuing operations attributable to CVS Caremark for the three months increased 12.4% to $1.3 billion, compared with $1.1 billion in the year-ago period. Adjusted earnings per share from continuing operations attributable to CVS Caremark for the three months ended Dec. 31, 2013 and 2012 was $1.12 and $0.96, respectively, at the high end of guidance.
Income from continuing operations attributable to CVS Caremark for the year increased 18.8% to $4.6 billion. Excluding a gain from a legal settlement and the loss on early extinguishment of debt, adjusted EPS increased 15.7% in 2013 to $3.96, at the high end of guidance.
“I’m very pleased with our fourth-quarter results, with adjusted earnings per share coming in at the high end of our guidance at $1.12 per share, capping off a terrific year,” Merlo said. “For full year 2013, we delivered strong growth in revenues, gross margins, operating margins and earnings across the CVS Caremark enterprise.”