It's scary to play "Lewis and Clark." But after listening to CVS Caremark's (NYSE:CVS) second-quarter conference call, it's quite apparent that the newly formed entity is intent on blazing a new health-care trail.
In terms of the quarterly specifics, as investors suspected, merger-related developments made it hard to discern the true operating potential of combining CVS, the largest drugstore chain by store count, with Caremark, one of the largest pharmacy benefit management (PBM) operators. The reported results definitely sounded impressive, with a 96% jump in revenue and 114% improvement in net earnings -- though this figure was a more mortal 17% when considering that shares outstanding jumped 82% so CVS could acquire Caremark on March 22.
The company's drugstores continue to post nice same-store sales, with a 5.7% increase in pharmacy sales and 5.9% growth in front-end sales of the convenient groceries, cosmetics, and other consumer goods that customers have to walk by to pick up their pharmacy prescriptions in the back of the store. Management also mentioned that front-end profit margins increased on a lower level of product markdowns. CVS Caremark stated that the forthcoming quarterly 10-Q it files with the SEC will contain other juicy drugstore and PBM details.
But overall, management expects 2007 to be a transition year and said it will be working to realize merger benefits over the next few years. In other words, it is taking a long-term view to transform the health-care industry as it creates a "single view of the patient," by offering multiple avenues for customers to obtain drugs, be it by mail order or store pickup. The new company also sees great potential in its MinuteClinics, which save customers a cumbersome trip to a traditional doctor's office.
CVS Caremark also talked of creating a "flexible fulfillment" environment, focused on providing the lowest cost and highest service. It fully intends on "improving access of health care for consumers," and if you've seen Michael Moore's overly simplistic yet thought-provoking Sicko flick, you fully realize that the nation's health-care system could use some work. PBM managed-care clients such as UnitedHealth Group (NYSE:UNH), Aetna (NYSE:AET), and Cigna (NYSE:CI) can also benefit as they pass this increased flexibility to their members.
Although the overall potential for the combined CVS Caremark remains uncertain, the prognosis certainly looks favorable. In the meantime, health-care consumers and competitors such as Walgreen (NYSE:WAG), Rite Aid (NYSE:RAD), and Medco Health (NYSE:MHS) will be watching closely.
For related Foolishness:
- Foolish Forecast: CVS Caremark Gets Ready to Rumble
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Fool contributor Ryan Fuhrmann is long shares of Walgreen but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
