CVS Caremark Corp.'s second-quarter net income jumped 18.4 percent, as its drugstores took business from rival Walgreen and an expansion of its pharmacy benefits management segment pushed revenue higher.
The Woonsocket, R.I., company's earnings topped Wall Street expectations, and it raised and narrowed its 2012 forecast.
CVS Caremark said a recently settled split between rival drugstore chain Walgreen Co. and Express Scripts Holding Co. sent more customers to CVS drugstores, and it aims to keep many of them. The split added between 6.5 million and 7 million prescriptions for CVS pharmacies in the quarter. That contributed about 3.5 cents per share to earnings after adding 3 cents in the first quarter.
Walgreen used to fill prescriptions for St. Louis-based Express Scripts, which runs drug plans for employers, insurers and other customers as the nation's largest pharmacy benefits manager, or PBM. The companies let a contract between them expire at the end of last year, but they said last month they will resume doing business in September.
Even so, CVS Caremark still forecasts a gain of about 5 cents per share in the third and fourth quarters combined from the split. In this year's fourth quarter, it expects to keep at least 50 percent of the business it has gained since the split began. CEO Larry Merlo said his company has developed a plan to retain customers that is based on "sophisticated analytics" and involves advertising, promotions and other ways of reaching out.
"We are very confident that we will retain a significant portion of that business," he told analysts.
Analyst Jeff Jonas said he thinks CVS can keep that retention rate steady beyond the fourth quarter. He noted that many new customers have signed up for automatic prescription refills and CVS loyalty cards, which are positive signs. Jonas follows CVS for Gabelli & Co., which owns CVS Caremark shares for clients.
In the second quarter, CVS Caremark earned $966 million, or 75 cents per share. That's up from $816 million, or 60 cents per share, a year ago.
Its adjusted earnings came to 81 cents a share. Analysts expected, on average, 79 cents per share, according to FactSet.
Revenue grew 16 percent to $30.71 billion, which fell short of the analyst forecast for revenue of $31.02 billion.
Revenue from CVS Caremark's PBM business climbed 28 percent to $18.4 billion, helped by the 2011 acquisition of Universal American Corp.'s Medicare prescription drug coverage business. Retail pharmacy revenue rose 7 percent to $15.8 billion, despite taking a hit from some generic drug introductions.
Generic drugs hurt pharmacy revenue because they cost less than brand-name products. But they also help profitability because they provide a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement received.
Revenue from pharmacies opened at least a year climbed 5.6 percent. That's considered a key indicator of retailer health because it leaves out results from locations that have opened or closed in the last year.
CVS Caremark now expects 2012 adjusted earnings to range between $3.32 and $3.38 per share, up from its previous forecast of $3.23 to $3.33 per share. Analysts expected $3.33 per share.
Company shares slipped 47 cents to $44.43 in Tuesday morning trading. Jonas said he thought the stock fell over concern that the company's earnings growth in 2013 may not match the pace it set this year, due partially to Walgreen and Express Scripts.
"It's definitely going to be slower, but it's still going to be very healthy," the analyst said.
CVS Caremark had 7,381 retail locations at the end of the quarter.