CVS Caremark 3Q profit up but loses big contracts

CVS 3rd-qtr profit jumps 39 pct, stock tumbles on lost Caremark contracts, unit chief retires

• By Marley Seaman, AP Health Writer
• On 4:49 pm EST, Thursday November 5, 2009

NEW YORK (AP) -- CVS Caremark disclosed more multibillion dollar contract losses in its pharmacy benefits management business and said the head of the unit will depart.

CEO Tom Ryan said CVS, which also runs the nation's second-biggest drug store chain, won't reach its goals in 2010 because of the sharp reversal of fortunes at the Caremark unit, which administers drug benefits for employers. CVS shares plunged 20 percent and took their biggest one-day loss in eight years.

In total, the company lost about $2 billion in 2010 revenue in the last three months. It now believes Caremark has lost $4.8 billion in contracts for next year.

Ryan profits at Caremark could drop as much as 10 or 12 percent compared to 2009. Three months ago, Ryan said CVS would be "very disappointed" if its total per-share profit did not grow 13 to 15 percent next year. He said CVS won't reach that level.

The company said Caremark President Howard McLure will retire Nov. 27, with Ryan taking over temporarily. McLure, 52, became Caremark's chief operating officer in 2005, and was named president when CVS bought Caremark. CVS said McLure had planned to retire for several months.

CVS said Ryan will be spending 80 percent of his time dealing with Caremark and has already found some areas for improvement. The company also hired a new marketing leader for Caremark on Wednesday.

A month ago, the company said it expected to lose coverage of a large number of Medicare Part D drug benefit members who are also eligible for Medicaid. CVS is losing about 500,000 of the "dual eligibles," which will cost $1.7 billion in revenue. It said other companies were more aggressive and outbid CVS to win that coverage. It also lost contracts with the states of New Jersey and Ohio. Earlier this year, health insurer Coventry Health Care Inc. said it would not renew a contract with CVS. Retired employees of automaker Chrysler also turned elsewhere.

Those clients cited pricing and customer service as key reasons for taking their business elsewhere, Ryan said. Other clients said they wanted to work with a smaller pharmacy benefits manager or one that did not also own a drugstore chain.

That is a potential rebuke the company's business model. CVS bought Caremark for $21.2 billion in March 2007, forming one of the largest drug purchasers in the country. Caremark aims to save money for health plans by cutting drug costs, and the combination with CVS makes it convenient for plan members to fill their prescriptions at CVS, bringing more customers to the stores.

However, the combination is working against CVS because plan sponsors feel the company's attentions are split between cutting drug costs and bringing more business to the drugstores, BMO Capital analyst Dave Shove said in an interview.

"The drug store wants to sell more pills and they want to sell more expensive pills, and the PBM wants to sell less pills and they want to sell cheaper pills," Shove said.

Shove said most of the lost business went to Medco Health Solutions, the largest PBM, although some went to Express Scripts. Medco confirmed it gained some of the low-income Medicare and Medicaid members, but did not disclose how many.

In heavy afternoon trading, CVS stock tumbled $7.28, or more than 20 percent, to $28.87. According to the Center for Research in Security Prices at The University of Chicago Booth School of Business, CVS shares last fell 20 percent in one day on Oct. 30, 2001.

CVS, based in Woonsocket, R.I., said Thursday that its third-quarter profit jumped 39 percent to $1.02 billion. Revenue rose 18 percent to $24.64 billion.

Looking ahead, the company narrowed its 2009 adjusted profit forecast to between $2.61 and $2.64 per share from prior guidance of $2.59 to $2.64 per share. Analysts surveyed by Thomson Reuters expect profit of $2.62 per share, on average.

Associated Press Writers Damian Troise in New York and Tom Murphy in Indianapolis contributed to this story.

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