CVS Caremark's first-quarter net income jumped 23 percent to top Wall Street's expectations, as generic drugs continued to improve profitability even though those prescriptions hurt revenue.
Generic drugs, which are cheaper, copycat versions of brand-name medicines, help a drugstore's bottom line because they provide a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement received. But they hurt drugstore revenue because generics cost less than brand-name drugs.
Drugstores and pharmacy benefits managers, or PBMs, which run prescription drug plans for employers and other customers, have reaped gains for several quarters now from a wave of patent expirations that have hit top-selling drugs. Patents protecting the world's two biggest selling drugs — cholesterol fighter Lipitor and blood thinner Plavix — expired in 2011 and 2012, respectively. That has exposed those medicines to intense competition from cheaper generic drugs.
CVS runs the second-largest drugstore chain with 7,400 locations and one of the nation's largest PBMs. It has benefited from the trend so much so that generic drugs now make up more than 81 percent of the prescriptions filled at its retail pharmacies, up from 78.1 percent in last year's first quarter.
"That's probably going to be a trend moving forward," said Vishnu Lekraj, a Morningstar analyst who covers CVS.
He said more generic prescriptions are being filled at pharmacies because they are cheaper, and drug plans are adjusting their formularies, or payment tiers, to encourage that
The Woonsocket, R.I., company said it has spurred greater generic drug use in part by creating a "value formulary" for prescription drug plan customers that limits use of more expensive brand-name drugs.
In addition to generic drugs, CVS said its first quarter results were boosted by a strong flu season and new clients. The company also said prescription drug plans for the government's Medicare program for seniors and disabled people brought more claims to its pharmacy network.
In the quarter, CVS earned $956 million, or 77 cents per share. That compares with earnings of $776 million, or 59 cents per share, in last year's quarter.
Adjusted earnings totaled 83 cents per share in the most recent quarter, and revenue fell slightly to $30.76 billion. Analysts expected, on average, earnings of 79 cents per share on about $30.37 billion in revenue, according to FactSet.
CVS Caremark said it is still benefiting from last year's business split between competitors Walgreen Co., the nation's largest drugstore chain, and Express Scripts Holding Co., the largest PBM. Those companies went several months at the start of 2012 without a new contract to work together, and many Walgreen customers migrated to CVS stores during the impasse because they needed a new place to fill prescriptions.
CVS Caremark CEO Larry Merlo told analysts they remain confident they will keep at least 60 percent of the prescriptions it gained through this year.
CVS Caremark also said Wednesday that it narrowed its forecast for 2013 earnings to a range of $3.89 to $4 per share. That compares to its forecast earlier this year for earnings of $3.86 to $4 per share. Analysts expect, on average, earnings of $3.96 per share.
CVS executives told analysts the company had a strong first quarter, but they narrowed their 2013 forecast — instead of raising it — to account for federal government funding cuts that will hit Medicare prescription drug coverage and for costs CVS Caremark incurred to consolidate some of its Medicare plans at the start of the year.
"We're very comfortable with where we stand, but we're ... one quarter into a four-quarter year, and we're going to play this out," Chief Financial Officer David Denton said.
CVS shares added 57 cents to close at $58.75 Wednesday. In earlier trading, its shares hit an all-time high of $59.25, according to FactSet.
Wednesday's all-time high topped the previous mark of $58.50 set just last week. The stock has been climbing since the company announced in December that it would raise the quarterly cash dividend it pays shareholders by more than 6 cents, or 38 percent, to 22.5 cents per share.
The share price has already risen more than 20 percent so far this year, and the stock has set and then topped several all-time high prices.
Analysts say investors also like CVS because of the dividend and the company's potential under the health care overhaul. The massive federal law is expected to expand prescription drug coverage to millions of uninsured people starting next year, and that should increase business for drugstores and PBMs.