CVS Misses, Cuts Guidance

CVS Caremark (CVS) reported an EPS of 60 cents for the second quarter of fiscal 2010, unchanged from the year-ago period. However, after considering certain adjustments, the EPS was 65 cents, missing the Zacks Consensus Estimate by 3 cents and unchanged from the year-ago period.

Revenues decreased 3.5% year over year to $24.0 billion, primarily due to a major disappointment in its Pharmacy Services segment. This segment recorded a 9% decline in revenues to $11.8 billion, driven by the termination of some large contracts (effective since January 2010) announced by the company earlier.

In addition, the number of lives covered under Medicare Part D program declined due to the 2010 competitive bidding process, partially offset by new client wins. However, after adjusting for the recent generic introductions, the decline in revenues would have been lower, at 3.1%.

Revenues of CVS’ other segment, Retail Pharmacy, increased 3.7% to $14.3 billion during the quarter with a 2.1% increase in total same-store sales. While pharmacy same-store sales rose 2.9%, front-end same-store sales increased 0.4%.

Pharmacy same-store sales were negatively impacted by 180 basis points due to the recent generic introductions, whereas the Maintenance Choice program had a positive impact of 290 basis points. Last year’s H1N1 flu treatments also affected same-store sales. The generic dispensing rate increased both in the Pharmacy Services and Retail Pharmacy segments by 320 basis points to 71.0% and 310 basis points to 72.7%, respectively.

Agreement with Aetna

Although the performance of the Pharmacy Services segment was disappointing due to the loss of contracts, the new contract with Aetna (AET) should boost the top line in future. We note that CVS has received a 12-year contract from Aetna to provide pharmacy benefit management (PBM) services to Aetna’s customers. This contract will enable CVS to cater to 9.7 million PBM members of Aetna and administer approximately $9.5 billion in annual drug spending. However, financial terms of the deal were not disclosed.

The deal, to be effective from January 1, 2011, has yet to receive regulatory approvals. As a part of the deal, Aetna will transfer about 800 of its PBM employees to CVS while retaining 1000.

This deal will have a negative impact of 1-2 cents to CVS’ adjusted EPS in 2010 due to implementation expenses, while it will be accretive by 1-3 cents in 2011 and exceeds 5 cents in 2012. Moreover, the impact will increase once the contract is fully implemented in 2013.


Based on a disappointing quarter, CVS has lowered its outlook for 2010. The company expects retail same-store sales to increase at 2%-3.5%, down from the previous guidance of 3.5%-5.5%. CVS also lowered its adjusted EPS outlook for 2010 to $2.68-$2.73 from $2.77-$2.84.

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AETNA INC-NEW (AET): Free Stock Analysis Report

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