CVS Caremark Corporation (CVS)

Q2 2010 Earnings Call Transcript

July 28, 2010 9:30 am ET


Nancy Christal – SVP of IR

Tom Ryan – Chairman and CEO

Dave Denton – EVP and CFO

Larry Merlo – President and COO; and President, CVS/Pharmacy

Per Lofberg – EVP; and President, Caremark Pharmacy Services


Eric Bosshard – Cleveland Research

Tom Gallucci – Lazard

Mark Wiltamuth – Morgan Stanley

Lisa Gill – J.P. Morgan

Neil Currie – UBS

Ann Hynes – Caris & Company

Scott Mushkin – Jefferies

Robert Willoughby – Banc of America

Meredith Adler – Barclays Capital

Steve Halper – Stifel Nicolaus

David Magee – SunTrust Robinson

Helene Wolk – Sanford Bernstein



Good morning. My name is Brooke, and I will be your conference operator today. At this time, I would like to welcome everyone to the CVS Caremark Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Nancy Christal, Senior Vice President of Investor Relations. Ms. Christal, you may begin your conference.

Nancy Christal

Thanks, Brooke. Good morning, everyone, and thanks for joining us today on short notice. We are very excited to tell you more about our new 12-year contract with Aetna. And in light of the Aetna news, we thought it made sense to accelerate our earnings announcement so we could get all of the information into the marketplace at once.

I'm here with our senior management team, Tom Ryan, Chairman and CEO of CVS Caremark, who'll discuss the strategic rationale and financial value of the Aetna agreement, walk through our quarterly business update, and touch on our revised 2010 earnings guidance; Dave Denton, Executive Vice President and CFO, who will provide a financial review of the quarter, as well as the details behind our revised guidance for this year; and Larry Merlo, President and COO; and Per Lofberg, President of our PBM business, both also here with me as well and they will participate in the question-and-answer session that follows our prepared remarks.

This morning, we will discuss some non-GAAP financial measures in talking about our company's performance, namely free cash flow, EBITDA, and adjusted EPS. In accordance with SEC regulations, you can find the definitions of the non-GAAP items I mentioned, as well as the reconciliations to comparable GAAP measures on the Investor Relations portion of our website at As always, today's call is being simulcast on our IR website. It will also be archived there for a one-month period following the call to make it easy for all investors to access it.

Let me also note quickly that we sent out invitations last week via e-mail for our 2010 Analyst Day, which will be held on the morning of Friday, October 8th in New York City. If you didn't receive an invitation and you are interested in attending, please contact my office.

Please note that in light of the accelerated earnings announcement, we won't be filing our 10-Q today, but we do expect to file it by the end of this week and it will be available through our website at that time.

Now, before we continue, our attorneys have asked me to read the Safe Harbor statement. During this presentation, we will make certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. Accordingly, for these forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We strongly recommend that you become familiar with the specific risks and uncertainties that are described in the Risk Factors section of our most recently filed Annual Report on Form 10-K and that you review the section entitled Cautionary Statement Concerning Forward-looking Statements in our most recently filed Quarterly Report on Form 10-Q.

And now, I will turn this over to our CEO, Tom Ryan.

Tom Ryan

Thanks, Nancy and good morning, everyone. As you know, last night we announced a 12-year strategic PBM agreement with Aetna, which we believe is the largest and longest-term new contract ever to have been negotiated in the PBM industry. It encompasses approximately $9.5 billion of annual drug spend for nearly 10 million lives.

Before I review the strategic and financial benefits of the agreement, I want to get right into our earnings guidance for the year. As noted in our press release, we are lowering our 2010 guidance for adjusted earnings per share from continuing operations to a range of $2.68 to $2.73 from a previous range of $2.77 to $2.84. It is obviously very important that you understand what's behind the numbers. So let me briefly explain the three reasons for our 2010 earnings guidance revision and the relative importance of each.

First, as all of you know, we continue to gain share and outpace all retail competitors in pharmacy. Having said that, there are – there was certainly softness showing up in the retail pharmacy sector as a whole and it's due to a variety of factors. Our analysis shows that baseline script trends across the industry have been impacted by three main issues.

First, the year-over-year decline in the flu has accelerated in the second quarter versus the first quarter. The rapid decline in the PPI category; recall that Prevacid went over-the-counter in November 9; as a result, we've seen the payer community change plan designs around that category and really force more members to the OTC product.

And lastly, new maintenance script starts are down across the industry, and this is due to fewer physician visits. Recent reports by IMS have indicated that fewer people are visiting doctors. We see this data on the fourth quarter versus the first quarter of this year, and we are expecting to see the same in the second quarter. They're visiting fewer primary care docs and specialists. Obviously, the sluggish economy and continued high unemployment have impacted peoples' ability to afford physician visits.

Therefore, in light of the projected Rx trends, and to a lesser degree our front-store trends, we are lowering our retail comps guidance from 3.5% to 5.5%, down to 2% to 3.5% growth. So retail comp guidance now is 2% to 3.5% growth. That accounts for about 4% to 5% of – $0.04 to $0.05 of a guidance change.

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