CVS plunges after bleak pharmacy benefits view
CHICAGO (Reuters) - CVS Caremark Corp (CVS.N) said its pharmacy benefits management business lost $4.8 billion in contracts heading into next year and will not meet its targets for 2010, sending shares down 21 percent.
The company also said on Thursday that the U.S. Federal Trade Commission is investigating certain business practices.
In another announcement likely to throw doubt on its March 2007 acquisition of pharmacy benefits management (PBM) company Caremark, CVS said that Caremark Pharmacy Services President Howard McLure, 52, would step down as of November 27 and a search for a successor would begin.
CVS Chief Executive Tom Ryan will take on the role in the interim. McClure was chief operating officer of Caremark when the acquisition closed.
"The headwinds on the PBM segment are greater than investors had contemplated heading into 2010," said JMP Securities analyst Constantine Davides. "The overarching issue that investors will continue to struggle with is do these two businesses belong together?"
CVS told investors on a conference call it no longer expected low to mid-single digit growth in its PBM business in 2010, and forecast a drop of PBM operating profit of 10 percent to 12 percent for the period.
"I'm not Pollyanna here. We get it. We've got to produce better results on the PBM side," Ryan said.
The comments overshadowed the company's quarterly results report earlier on Thursday. CVS posted a bigger-than-expected jump in quarterly profit and said this year's profit should come in toward the higher end of its forecast.
CVS SAYS BELIEVES IN COMBINED MODEL
The PBM tallied about $4.8 billion in net losses for 2010 during the recent selling season, and almost $3.7 billion of those losses came after CVS's August conference call.
Ryan stressed that CVS did not lose business because of the combination of the PBM and retail businesses and said he still believes the combined model is the right approach. Still, he said it was "fairly common knowledge" that the PBM's marketing message was unclear and too focused on the retail side.
Marketing is a key part of the sophisticated PBM sales process, said Davides. He said rivals Medco Health Solutions Inc (MHS.N) and Express Scripts Inc (ESRX.O) have outperformed CVS Caremark in retaining and adding clients.
On Wednesday, CVS named Len Greer to run marketing for the PBM. Greer joined CVS from ActiveHealth and previously spent six years at Medco in senior marketing roles.
CVS shares fell $7.58 to $28.57 in heavy trading on the New York Stock Exchange on Thursday. Volume was also heavy in the options market, where traders exchanged about 226,000 contracts, 25 times the average daily turnover, according to option analytics firm Trade Alert.
Medco and Express Scripts shares each slipped less than 1 percent. CVS's main drugstore rival, Walgreen Co (WAG.N), saw its shares rise 0.9 percent.
CVS also said 10-year company veteran David Denton would replace Dave Rickard as chief financial officer in January. Rickard had announced his plans to retire back in February.
SAME-STORE SALES FALL SHORT
CVS's quarterly results benefited from its "Maintenance Choice" program, which allows customers to pick up 90-day prescriptions in its drugstores at the same lower price they would pay through its pharmacy benefits unit's mail service.
That plan boosted pharmacy sales at stores open at least a year by about 2.5 percentage points, and now has 417 clients participating, up from 270 in the second quarter.
Still, same-store sales of general merchandise rose just 0.8 percent, and overall same-store sales rose 5.7 percent, short of the company's target of 6 percent to 8 percent.
CVS earned $1.02 billion, or 71 cents per share, up from $732.5 million, or 50 cents per share, a year earlier.
Adjusted third-quarter earnings from continuing operations were 65 cents per share, while analysts' average forecast was 64 cents, according to Thomson Reuters I/B/E/S.
Net revenue jumped 18.1 percent to $24.64 billion, topping analysts' average forecast of $24.61 billion. Revenue climbed 23.4 percent in the pharmacy services unit and 17.9 percent in the retail unit.
CVS said it now expects 2009 adjusted earnings per share from continuing operations of $2.61 to $2.64, versus a prior forecast of $2.59 to $2.64. Analysts expect $2.62.
It expects revenue to rise 12 percent to 14 percent this year, with same-store sales still expected to climb 4 percent to 6 percent despite consumers' focus on cheaper goods.
The company also said it is close to completing its $2 billion share buyback authorization and the board approved an additional $2 billion in repurchases.
(Reporting by Jessica Wohl, additional reporting by Doris Frankel; Editing by Maureen Bavdek, Dave Zimmerman, Phil Berlowitz)
