CVS Plunges on $2B in Lost Contracts

(Updated with stock movements, and additional analyst insight into the underlying causes of the company's loss of contracts.)

WOONSOCKET, R.I. (TheStreet) -- Shares of CVS Caremark(CVS Quote) plunged 20% Thursday morning, after the drugstore chain said its pharmacy benefits-management unit recently lost $2 billion worth of business, causing it to issue a profit warning.

On top of all that, the drugstore said the Federal Trade Commission is investigating some of its business practices. While CVS did not reveal the nature of the "non-public investigation" it did say it did not violate any antitrust laws.

The investigation could be connected to complaints made by the Change and Win coalition of labor unions, which has argued that CVS' size and buying power is bad for consumers, and accused the company of stocking expired products and violating patients' privacy, among other issues

The news comes as the drugstore reported a 39% jump in quarterly earnings. Investors, however, sold ferociously on the outlook, and CVS shares dropped 20.5% to $28.73 in afternoon trading. Volume reached 56 million shares, more than five times the daily average.

CEO Tom Ryan said CVS will not meet its own 2010 forecast, because profits at its pharmacy benefits management unit Caremark could tank by 10% to 12%.

Previously, Ryan said he would be disappointed if the company's profit didn't grow by 13% to 15% in 2010.

CVS said it lost a contract worth $1.7 billion to provide prescriptions to "dual eligible" people who receive both Medicare and Medicaid benefits, as well as another $300 million in similar contracts with the New Jersey state Blue Cross plan and Ohio's managed Medicare business.

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Toon van Beeck, an analyst at IBISWorld, said the most probable reasons for CVS losing these contracts is that they were unable to compete on service and price.

CVS acquired Caremark in March 2007. President of the division, Howard McLure, is stepping down on Nov. 27, and the company is currently in the process of searching for his replacement. In the interim, Ryan will fill the role.

As for the company's overshadowed third-quarter results, CVS said it earned $1.02 billion, or 71 cents a share, compared with $732.5 million, or 50 cents a share, in the year-ago period.

Excluding a tax benefit, CVS earned 65 cents a share in the quarter, beating analysts' expectations by a penny.