CVS 2007 Annual Report Download - page 24

20 I CVS Caremark
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Results of Operations and Industry Analysis
Summary of the Consolidated Financial Results
The Company’s fiscal year is a 52 or 53 week period ending on
the Saturday closest to December 31. Fiscal 2007, which ended on
December 29, 2007, fiscal 2006, which ended on December 30,
2006, and fiscal 2005, which ended on December 31, 2005,
each included 52 weeks. Unless otherwise noted, all references
to years relate to these fiscal years.
Fiscal Year Ended
In millions, except per
common share amounts 2007 2006 2005
Net revenues $ 76,329.5 $ 43,821.4 $ 37,006.7
Gross profit 16,107.7 11,742.2 9,694.6
Total operating expenses 11,314.4 9,300.6 7,675.1
Operating profit 4,793.3 2,441.6 2,019.5
Interest expense, net 434.6 215.8 110.5
Earnings before income
tax provision 4,358.7 2,225.8 1,909.0
Income tax provision 1,721.7 856.9 684.3
Net earnings $ 2,637.0 $ 1,368.9 $ 1,224.7
Diluted earnings per
common share $ 1.92 $ 1.60 $ 1.45
Net revenues increased $32.5 billion during 2007 primarily
due to (i) the Caremark Merger, which resulted in an increase in
Pharmacy Services revenue of $26.5 billion, and (ii) the inclusion of
a full year of financial results and growth of the Standalone Drug
Business, which resulted in an increase in Retail Pharmacy revenue
of $2.2 billion. Net revenues increased $6.8 billion during 2006
primarily due to the acquisition of the Standalone Drug Business.
Gross profit increased $4.4 billion during 2007 due primarily
to the Caremark Merger. We achieved approximately $400 million
in purchasing and operating synergies (the vast majority of which
were purchase related) resulting from the Caremark Merger. In
addition, we continued to benefit from the increased utilization
of generic drugs (which normally yield a higher gross profit rate
than equivalent brand name drugs) in both the Retail Pharmacy
and Pharmacy Services segments. During 2006, gross profit
increased $2.0 billion primarily due to increased utilization of
generic drugs in both the Retail Pharmacy and Pharmacy Services
segments. However, the increased use of generic drugs has
resulted in pressure to decrease reimbursement payments to
retail and mail order pharmacies for generic drugs. We expect
this trend to continue.
In addition, our pharmacy services business participates in the
administration of the Medicare Part D drug benefit through the
provision of pharmacy benefit management (“PBM”) services
to health plan clients as well as clients that have qualified as a
Medicare Part D prescription drug plan. Caremark also partici-
pates by offering Medicare Part D benefits through our SilverScript
Insurance Company (“SilverScript”) subsidiary, which sponsors
one of the top 10 Medicare Part D prescription drug plans in
the country. In addition, PharmaCare, through a joint venture
with Universal American Financial Corp., also participates in
the offering of Medicare Part D pharmacy benefits by affiliated
entities of Universal American.
Our pharmacy services business generates net revenues primarily
by contracting with clients to provide prescription drugs to plan
participants. Prescription drugs are dispensed by our mail order
pharmacies, our specialty pharmacies and by retail pharmacies
in our national network (including CVS/pharmacy stores). Net
revenues are also generated by providing to clients certain
additional services, including administrative services like claims
processing and formulary management as well as healthcare
related services like disease management.
Our pharmacy services business operates under the Caremark
Pharmacy Services, PharmaCare Management Services and
PharmaCare Pharmacy names. As of December 29, 2007, the
pharmacy services business operated 56 retail specialty pharmacy
stores, 20 specialty mail order pharmacies and 9 mail order
pharmacies located in 26 states and the District of Columbia.