* Generic drugs lift gross margin at retail, PBM
* CEO still confident can keep 60 pct of business won from Walgreen fight
* Shares rise 1.4 pct (Adds CEO comments, industry background, updates share price)
By Phil Wahba
May 1 (Reuters) - CVS Caremark Corp posted a higher than expected first-quarter profit on Wednesday, helped by more profitable generic drugs on the market and a severe cold and flu season that boosted sales at its drugstores.
Generic drugs generate lower revenue but higher profit than branded medicines, contributing to the sharp jump in profit even as the company's overall revenue dipped slightly.
"The influx of new generic drugs was a key driver of our year-over-year profit growth," Chief Executive Larry Merlo told analysts on a conference all.
CVS shares were up 1.4 percent at $58.97 at midday on Wednesday on the New York Stock Exchange.
CVS rivals Rite Aid Corp and Walgreen Co have also reported a rise in sales of generic drugs of late.
Blockbuster drugs facing competition from generics after losing patent protection in the last year include Merck & Co Inc's asthma drug Singulair, and Bristol-Myers Squibb Co's blood clot prevention drug Plavix.
CVS Caremark was formed when drugstore chain CVS bought the Caremark pharmacy benefits management business in 2007 in a $27 billion stock deal. The company initially faced scorn from some industry-watchers for its combined model of running drugstores and a pharmacy benefits management unit, which administers drug benefits for employers and health plans and runs a large mail order pharmacy.
Lately, though, CVS has been putting more pressure on rivals that operate in a limited part of the sector.
LIFTS LOWER END OF OUTLOOK
Revenue in the pharmacy benefits management unit rose just 0.1 percent to $18.31 billion in the quarter ended March 31.
But the unit's gross profit margin increased 1.2 percentage points to 4.2 percent of sales.
Generic drugs also lifted profitability at CVS's retail business, where gross profit was 30.9 percent of sales, up 2.4 points. Revenue in the retail division rose 0.2 percent to $10.05 billion, while same-store sales of general merchandise items were up 1.2 percent.
CVS said net income rose to $956 million, or 77 cents per share, from $776 million, or 59 cents a share, a year earlier.
It reported a profit of 83 cents per share from continuing operations, excluding special items. That was 4 cents more than what Wall Street was expecting, according to Thomson Reuters I/B/E/S.
It was also 3 cents better than the top of CVS's forecast.
Still, CVS did not raise the upper limit of its earlier 2013 earnings forecast from $4 a share. It cited across-the-board federal spending cuts known as sequestration, which have led to less spending on drugs for the U.S. government's Medicare program for older people.
CVS did increase the lower end of the profit outlook to $3.89 a share from $3.86. Wall Street was expecting $3.97 for the full year.
Companywide revenue slipped 0.1 percent to $30.76 billion, but exceeded the $30.36 billion that Wall Street expected, according to Thomson Reuters I/B/E/S.
CVS has faced pressure from Walgreen, which has been trying to win back customers following a now-resolved impasse with Express Scripts Holding Co in which Walgreen stopped filling Express Scripts prescriptions for most of 2012.
Merlo told Wall Street analysts he is still "very confident" that CVS can keep at least 60 percent of the business it picked up from the Walgreen-Express Scripts spat.
The so-called selling season in which PBMs like Caremark pitch companies is just under way, and company executives declined to say how it is progressing so far. Merlo said only that pricing was "competitive, but rational so far."
Overall, CVS expects the dollar value of PBM contracts industrywide to be slightly up in 2013. (Reporting by Phil Wahba in New York and Jessica Wohl in Chicago; editing by Jeffrey Benkoe, Lisa Von Ahn and Matthew Lewis)