Published December 13, 2012
D – CVS Caremark Corp is looking at changes in U.S. healthcare as an opportunity to serve more customers, whether they are picking up prescriptions, getting them through the mail or stopping by an in-house MinuteClinic for a checkup.
The company, formed when drugstore chain CVS bought pharmacy benefits manager Caremark in 2007 in a $27 billion all-stock deal, gave a 2013 forecast on Thursday that exceeded Wall Street estimates as it tries to use its combined businesses to its advantage. It also said that this year's results are trending toward the high end of its expectations.
The merger, scorned by some industry watchers years ago, now appears to be putting more pressure on rivals that operate in a limited part of the sector, as CVS is gaining ground with its model of combined retail, drug benefits management and clinic.
"CVS' integrated model messaging has been gaining momentum over the past few years, while other players will need to convince the market that their new business strategies will ultimately prove superior," said ISI Group analyst Ross Muken.
Muken raised his price target on CVS shares to $57, from $53.50, after the company's forecast.
Shares of CVS rose as much as 4.7 percent to an all-time high on Thursday. Shares of its larger drugstore rival, Walgreen Co, and its larger competitor in the pharmacy benefits management (PBM) business, Express Scripts Holding Co, each fell less than 1 percent.
The coming year stands to be a busy one for the healthcare sector as the United States prepares for 30 million people to join the ranks of insured patients under the Affordable Care Act, or "Obamacare," starting in 2014. The large population of aging baby boomers and rising demand for specialty drugs could be opportunities for companies such as CVS.
The industry is already seeing rapid growth in the number of people signing up for Medicare Part D prescription plans, which are part of the Medicare healthcare plan for older people.
"You've got 10,000 baby boomers becoming eligible for Medicare every day now," CVS Chief Executive Officer Larry Merlo said. "The change is upon us, and it will evolve over the next several years."
At the same time, the number of Americans with chronic diseases keeps rising, and those patients spend five times more than others on healthcare as they often need to visit doctors more frequently and take medications, Merlo said. If complications arise, additional treatment can be costly.
About half of Americans suffer from one or more chronic diseases. Among those who are newly diagnosed with a chronic disease, almost half fail to stick with their drug regimen in the first year, Merlo said.
Merlo said that CVS can play a bigger role in getting patients with chronic conditions such as diabetes to keep taking their drugs, which can save billions of dollars.
"The lack of medication adherence is costing our healthcare system some $300 billion a year in unnecessary costs," he said.
For 2013, CVS expects to earn $3.84 to $3.98 per share, excluding special items. Analysts on average were expecting $3.82, according to Thomson Reuters I/B/E/S.
The company's forecast assumes the repurchase of $4 billion of its shares during 2013. CVS has bought back $3.5 billion to $4 billion worth of its stock annually since 2010.
CVS also plans to raise its quarterly dividend by 38 percent, bringing the payout to 22.5 cents per share.
First-quarter revenue should fall 2.5 percent to 4 percent due to the rise in usage of generic drugs, which sell at lower prices than branded drugs but are more profitable, it said.
CVS forecast first-quarter earnings of 77 cents to 80 cents per share before items, while analysts expected 74 cents.
Meanwhile, its main competitors have work to do.
Walgreen Co is trying to lure patients back to its stores after reaching a new contract with Express Scripts.
CVS still expects to retain at least 60 percent of the Walgreen patrons that switched to its chain during an 8-1/2 month impasse when Walgreen and Express Scripts stopped working together. That is expected to boost CVS' fourth-quarter earnings by at least 12.5 cents per share.
In November, Express Scripts said its business would come under pressure because of the weak economy, leaving analysts to question that company's strategy in the wake of its acquisition of another PBM, Medco Health Solutions.
Merlo declined to comment on whether CVS planned any acquisitions, adding that it was always reviewing "bolt-on" purchases to support its retail or PBM units.
More patients have been coming to CVS's 650 MinuteClinic healthcare clinics, and the company plans to have more than 1,500 of the clinics by 2017. The day after Thanksgiving was their busiest day to date, with 19,000 visits on Nov. 23. CVS expects more than 3 million visits to MinuteClinic in 2012.
Shares of CVS were up 1.9 percent at $48.48 in afternoon trading after rising as high as $49.76 earlier in the session.