CVS Caremark Corp. will follow a strong finish to 2011 that included a late December dividend increase with its fourth-quarter earnings report on Wednesday.
WHAT TO WATCH FOR: Insight into how a split between fellow drugstore operator Walgreen Co. and Express Scripts Inc. split has affected business at CVS.
Walgreen and Express Scripts, a pharmacy benefits manager, let a contract between them expire at the end of year. Express Scripts paid Walgreen to fill prescriptions, but the companies had said for months before the end of last year that they were preparing to stop doing business.
Pharmacy benefits managers, or PBMs, run prescription drug plans and use large purchasing power to negotiate lower drug prices. They make their money by reducing costs for health plan sponsors and members. CVS's Caremark unit is a PBM.
Walgreen said Friday that January revenue from stores open at least a year fell, as the Express Scripts split and a weak flu season hurt business.
CVS won't see a huge impact from this in the fourth quarter, but company officials may talk about whether January sales were impacted by customers looking for a new drugstore because of the split.
The company also may see some impact on its pharmacy sales from the introduction of generic versions of the cholesterol fighter Lipitor and the antipsychotic Zyprexa. Generic drugs, which are cheaper than brand-name alternatives, tend to depress pharmacy revenue but improve profit margins. Those generics entered the market late in the fourth quarter, so they also shouldn't be a huge factor, Morningstar analyst Matthew Coffina said.
CVS said Dec. 20 that it was raising its quarterly dividend 30 percent to 16.25 cents, and it expected profit from its Caremark business to grow in 2012, reversing two years of declines. The company's stock rallied after the announcement.
"We think the market has transitioned from concern over PBM profitability to confidence in management and CVS' business strategy," Barclays analyst Meredith Adler said earlier this month in a research note.
Overall, the company said in December it expected earnings of $3.15 to $3.25 per share for 2012, excluding one-time items.
Analysts expect earnings of $3.25 per share, on average.
WHY IT MATTERS: The Woonsocket, R.I., company is one of the biggest pharmacy benefits managers in the United States, with market share about equal to Express Scripts and Medco. But if Express Scripts is able to buy Medco, the resulting company would be far larger than Caremark. Express Scripts agreed to buy Medco in July for $29.1 billion, and the companies hope to close the deal in the first half of 2012.
CVS also is the second-largest chain of drugstores in the U.S. with more than 7,300 locations, trailing only Walgreen.
WHAT'S EXPECTED: Analysts surveyed by FactSet expect, on average, earnings of 89 cents per share on $28.09 billion in sales in the fourth quarter.
2010 QUARTER: CVS Caremark's earnings fell 2 percent to $1.03 billion from $1.05 billion, but its per-share income grew to 75 cents from 74 cents because the company had fewer shares on the market than it did the previous year.
Revenue fell to $24.77 billion from $25.82 billion, reflecting a 10 percent decline in Caremark's revenue due to client losses and fewer Medicare prescription drug program members.
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