CVS announces deal with Aetna, 2Q profit falls

CVS Caremark Corp. Wednesday reported weaker quarterly earnings and lowered its profit forecast, but shares rose as investors approved of a large pharmacy benefit management services contract struck with Aetna.

CVS Caremark will administer Aetna's retail pharmacy store network and manage customer service. It will also handle prescription drug purchasing, manage inventories, and fill prescriptions for Aetna's mail order and specialty pharmacy operations. The contract will ramp up over several years and bring in revenue of $8.2 billion next year. CEO Tom Ryan said the 12-year contract is the largest and longest contract in the industry.

The contract offsets other major contracts lost in the past year. That lost business pushed second-quarter net income down 7 percent to $821 million from $886 million. On a per-share basis, profit was unchanged at 60 cents as the company had fewer shares outstanding this quarter. CVS earned 65 cents per share if amortization costs and other one-time items are excluded.

According to a survey by Thomson Reuters, analysts expected a profit of 68 cents per share.

The Woonsocket, R.I., company's revenue fell 3 percent to $24 billion from $24.87 billion. Revenue from its drugstore network rose 4 percent to $14.31 billion, but because of the contract losses, Caremark's revenue fell 9 percent to $11.84 billion. The figures add up to more than $24 billion because some revenue is counted under both businesses. Analysts expected $24.13 billion in revenue, on average.

Revenue at locations open at least a year grew 2.1 percent. The metric is a key measurement of retailer health because it excludes results at stores that have opened or closed over the past 12 months. The company runs 7,109 stores nationwide, about 400 less than Walgreen Co.

The Caremark Maintenance Choice program boosted prescriptions filled at retail stores, while the milder flu season and earlier Easter holiday hurt results.

Looking ahead, CVS forecast a weak third quarter and cut its profit and revenue expectations for the year, citing higher litigation costs, the effects of the weak economy and high unemployment, and startup costs connected to the Aetna deal.

It now expects a profit of $2.68 to $2.73 per share this year, down from $2.77 to $2.84 per share. Analysts expect $2.79 per share.

The companies said Caremark will serve about 9.7 million Aetna PBM members and administer $9.5 billion in drug spending per year.

Pharmacy benefits managers handle drug benefits for health plan members and sponsors. They buy large amounts of drugs to fill prescriptions, which is one way they can save money for clients. Aetna said one reason it chose Caremark was its ability to negotiate lower drugs prices. Caremark is one of the largest pharmacy benefits managers in the U.S

PBMs also try to make sure plan members continue taking their medications to avoid more expensive complications. They also work to keep prescription costs down by filling orders by mail with cheaper generic drugs.

Aetna will still own its pharmacy benefits management business, but it will transfer 800 employees to Caremark. Another 1,000 employees will remain with Aetna.

The contract will reduce CVS's profit by a penny to 2 cents per share in 2010. After that it will begin adding to results.

CVS said it lost a few small accounts because of its public spat with Walgreen over payments and Caremark policies. It said the disagreement had little effect on its business, and excluding the contract with Aetna, Caremark has gained $350 million in new business for next year.

In afternoon trading, CVS Caremark shares rose $1.34, or 4.4 percent, to $31.94.