July 28, 2010 / 11:39 AM / 7 years ago

CVS cites progress in drug plan business

NEW YORK (Reuters) - CVS Caremark Corp (CVS.N) said it was reviving its pharmacy benefits management business, including a new long-term contract with health insurer Aetna Inc (AET.N), boosting its shares over 3 percent on Wednesday.

CVS Caremark Chief Executive Tom Ryan said a key period for selling PBM contracts last month had been successful, yielding new contracts, and that the company had effectively landed half of the business up for renewal in 2011 so far.

Late on Tuesday, the company announced a 12-year deal to manage some pharmacy benefits for about 9.7 million Aetna pharmacy members and administer about $9.5 billion in annual drug spending.

The progress brightened an otherwise disappointing view for sales and earnings in 2010 due to a weak U.S. economy that is hurting both its drugstore operations and PBM business. Ryan noted that consumers hard-hit by joblessness and credit woes were making fewer visits to their doctor.

CVS said it now expects 2010 same-store sales to rise by 2 to 3.5 percent, down from a previous view of a 3.5 to 5.5 percent rise. It forecast earnings per share of $2.68 to $2.73, below the Wall Street consensus estimate of $2.79.

CVS's second-quarter net income fell to $821 million from $886 million a year earlier. The per-share figure was unchanged at 60 cents.

Excluding items, CVS earned 68 cents per share, in line with Wall Street expectations, according to Thomson Reuters I/B/E/S.

Quarterly revenue in its pharmacy business fell 9 percent to $11.8 billion and total net revenue slid 3.5 percent to $24.01 billion. Same-store sales rose 2.1 percent.

Standard & Poor's Equity Research analyst Joseph Agnese cheered the news in a note and reiterated his "strong buy" recommendation, while Lazard Capital Markets analyst Tom Gallucci called the Aetna deal "a boost" and wrote that CVS shares would be attractive for long-term investors.

CVS shares rose 95 cents to $31.55. Aetna shares slid 2.8 percent on investor disappointment that it did not plan to sell its drug benefit business outright.

AETNA DEAL TIMING CRITICAL

The Aetna contract comes at an important time for CVS, as it works to rebuild its PBM business and show investors that its $27 billion purchase of Caremark in 2007 was a good deal, after losing $4.8 billion worth of PBM contracts last year.

Last month, CVS and archrival Walgreen Co WAG.N ended a brief but tense standoff over reimbursements for drug prescriptions that could have cost both drugstore chains billions in sales. Caremark members were allowed to continue having their prescriptions filled at Walgreens stores.

CVS's PBM business administers prescription drug benefits for employers and health plans. It also operates a large mail-order pharmacy.

Ryan said the dust-up with Walgreen, which took place during its annual selling season, had no significant effect.

CVS said that 2010 profits would be hurt by higher-than-expected legal expenses and costs of 1 to 2 cent per share to implement the Aetna contract.

Beginning in 2011, the Aetna agreement is expected to contribute to profits, with an extra 1 to 3 cents per share next year, 5 cents per share in 2012 and then 10 cents per share as of 2013, once the contract is fully implemented.

Reporting by Phil Wahba, additional reporting by Martinne Geller; Editing by Michele Gershberg, John Wallace, Gunna Dickson and Richard Chang

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