CVS Caremark sees PBM strength in 2012, shares up

(Reuters) - CVS Caremark Corp (CVS.N) on Tuesday silenced some critics of its 2007 merger as it showed that major corporations are choosing its combination of pharmacy benefits management and drugstores as a way to cut healthcare costs.

IBM (IBM.N), Eli Lilly and Co (LLY.N) and others have signed up for the company's Caremark pharmacy benefits management plan for 2012, executives said at an analyst meeting on Tuesday.

Those additions, along with a healthy dose of branded drugs moving to more profitable generic versions, should help push operating profit at the Caremark unit up 11 percent to 15 percent next year, said Chief Financial Officer Dave Denton.

Shares of CVS, which also said earnings should increase next year and raised its dividend, rose as much as 9 percent to their highest level since June 2008.

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and run mail-order pharmacies. CVS can add the ability to pick up prescriptions at its namesake drugstores in Maintenance Choice, a service that IBM and some other new clients have signed up for.

The company's PBM is expected to show a roughly 7 percent to 8 percent decline in operating profit for 2011, as CVS worked on turning around results.

"It was only a few years ago that we were selling the belief that we could do all this," said Chief Executive Larry Merlo. "Today, we're selling the results."

Since the completion of the $27 billion deal in 2007 that merged CVS and Caremark, CVS has tried to address criticism that the combination has crushed profitability. The PBM hit a low point in late 2009, when it lost $4.8 billion in contracts and its president left.

Fast forward two years, and the unit has signed $12.3 billion in new contracts for 2012, up from $10.8 billion a year earlier, said Per Lofberg, president of Caremark pharmacy services, who joined the company in 2010. Caremark also retained 98 percent of its clients, improving upon retention rates of 96 percent and 90 percent in the prior two years.

"Overall the multiyear turnaround is gaining momentum," said Deutsche Bank analyst Ross Muken, who attended the meeting.

Among the new contract wins, Caremark will start to handle PBM services for IBM and for pension fund and benefits manager CalPERS, which it said were both previously clients of Medco Health Solutions Inc MHS.N.

Now, CVS is busy adding services to satisfy such clients. Its Pharmacy Advisor program, currently focused on diabetes, tries to help patients better adhere to drug regimens. Next year, the program will be expanded to include certain cardiovascular conditions, asthma, depression, cancer and osteoporosis, CVS said. Other conditions, such as arthritis, should be added thereafter.

Shares of CVS ended regular trading on Tuesday up 8.9 percent at $39.80, while shares of Walgreen Co (WAG.N), its largest drugstore competitor, rose 2.3 percent to $33.50.

Walgreen is due to report quarterly results on Wednesday.

(For a graphic that compares CVS Caremark and Walgreen, click on link.reuters.com/vus65s)

2012 FORECAST

CVS forecast adjusted earnings per share of $3.15 to $3.25 for 2012, which would be an increase of 13 percent to 16.5 percent from the midpoint of its 2011 forecast. Analysts on average have forecast $3.21 a share, according to Thomson Reuters I/B/E/S.

Revenue is expected to rise 11.5 percent to 13 percent.

Sales at stores open at least a year, or same-store sales, are only expected to rise 0.5 percent to 1.5 percent, as CVS feels the impact of generic versions of popular drugs, such as Lipitor and Plavix, hitting the market. Generic drugs produce lower revenue than their branded counterparts but are more profitable for CVS and others to sell.

CVS said its forecast excluded any potential benefits from an end to the relationship between Walgreen and pharmacy benefits manager Express Scripts Inc (ESRX.O), which have not yet agreed on a new contract.

The current contract between Walgreen and Express Scripts expires on December 31. If Walgreen stops filling roughly $5 billion annually in Express Scripts prescriptions, sales at other pharmacies could increase.

An end to that contract could add 8 cents to 11 cents per share to CVS earnings in 2012, CFO Denton said.

The company also said that it expects to earn 58 cents to 60 cents on an adjusted basis in the first quarter.

CVS said its board had approved a 30 percent increase in its dividend, payable in February, bringing the quarterly payout to 16.25 cents per share from 12.5 cents. The dividend increased nearly 43 percent in January.

(Reporting by Jessica Wohl in Chicago; Editing by John Wallace and Steve Orlofsky)