* Generic drugs lift gross margin at retail, PBM
* CEO still confident can keep 60 pct of business won from
* Shares rise 1.4 pct
(Adds CEO comments, industry background, updates share price)
By Phil Wahba
May 1 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
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
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