UPDATE 2-CVS full-year forecast disappoints, shares slide

(Adds analysts' comments, estimate details, updates shares)

By Jessica Wohl

CHICAGO, Jan 9 (Reuters) - CVS Caremark Corp (CVS.N) issued a bleak 2009 forecast after it gave lower rates to more than half of its pharmacy benefit clients in order to lock in their contracts, sending its shares down as much as 13 percent.

CVS bought Caremark, a major pharmacy benefits manager, in March 2007 as part of a strategy to diversify beyond the typical drugstore business.

While Chairman and Chief Executive Tom Ryan said the company's drugstores are doing "remarkably well" given the recession's impact on consumer spending, CVS is seeing margin pressure in its pharmacy benefit manager (PBM) business.

"The economy did factor in. You had people thinking about their businesses going forward," Ryan said on a conference call.

Pharmacy benefit managers (PBMs) like CVS Caremark administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies.

As the recession forces clients to cut costs, those customers are, in turn, demanding better terms from PBMs, which is eating into profit margins.

CVS expects its PBM operating profit to rise a weaker-than-expected 2 percent to 5 percent this year. On the retail side it expects a 7 percent to 10 percent rise, including costs from the October 2008 acquisition of Longs Drug.

CVS said after losing some contracts and bringing in others, it has $2.5 billion in net new PBM business for 2009. PBM contracts are typically less profitable in the first year, but the addition of those contracts should help profit in the next two years.

"I don't think it is as bad as it appears. I could understand why the stock is taking it hard today, because it is a perceived problem with a new entity," said SunTrust Robinson Humphrey analyst David Magee, who has a "buy" rating on the shares. "I don't think this is any kind of permanent problem with this company."

Shares of CVS fell $3.07 to $26.27, after falling to an intraday low of $25.50 earlier in the session. The shares have shed about a quarter of their value since CVS bought Caremark.

Rival PBMs Medco Health Solutions Inc (MHS.N) and Express Scripts Inc (ESRX.O) shares tumbled as much as 8 percent.

CVS issued its forecast a day after rival drugstore Walgreen Co (WAG.N) said it was cutting 1,000 jobs [nN08528190]. Its shares dropped as much as 4.6 percent.

FORECAST BELOW EXPECTATIONS

CVS forecast 2009 net earnings of $2.35 to $2.43 per share, below analysts' average estimate of $2.56, according to Reuters Estimates.