CVS Plunges on $2B in Lost Contracts

Shares of CVS Caremark fall 20% in morning trading after the drugstore announces that it lost $2 billion in business at its pharmacy benefits management unit.
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(Updated with stock movements, and additional analyst insight into the underlying causes of the company's loss of contracts.)



) -- Shares of

CVS Caremark

(CVS) - Get Report

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.

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.

Revenue climbed 18% to $24.64 billion, while same-store sales jumped 5.7%. Revenue at Caremark pharmacy benefits management business soared 23.4%.

The drugstore received an added boost from flu related prescriptions, which rose 10%.

"When you compare CVS to rivals Walgreen and Rite Aid they are on the right track and more profitable than the other two," van Beeck says.

Van Beeck also commented that the enormous stock drop-off is a bit drastic, considering how much other growth the company has as the Baby Boomers age, and mail-order prescriptions gain steam.

Looking ahead, CVS narrowed its full-year earnings forecast to between $2.61 and $2.64 a share from prior guidance of $2.59 to $2.64 a share. Analysts expect profit of $2.62.

On Wednesday, rival



reported a 4.9% jump in its October same-store sales, as it saw an unexpected boost from front-end sales.

Rite Aid

(RAD) - Get Report

, meanwhile, posted a 0.5% slip in its comparable sales for the month.

-- Reported by Jeanine Poggi in New York

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