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Pharmacy Profits Up In Down Economy

Investor backlash over its aggressive acquisition and merger strategy in recent months, CVS Caremark Corp (CVS.N) said recent problems at its pharmacy benefits management unit have been corrected and it posted a slightly better-than-expected rise in quarterly profit, driving the company’s shares up as much as 8.8 percent. CVS also said 2010 earnings could top analysts’ views.

Just three months ago, CVS shocked investors when it said the pharmacy benefits business (formerly Caremark) which administers prescription drug benefits for employers and health insurance companies and operates a large mail-order pharmacy, lost out on about $4.8 billion of business heading into 2010, leading to the departure of the unit’s president. Investors appeared to be unconcerned that total sales missed analysts’ projections, as sales at its retail drugstores that have been open at least a year far outpaced recent results at larger rival chain Walgreen Co (WAG.N).

CVS Chief Financial Officer Dave Denton told Reuters during the earnings conference call that consumers were still “very cautious” with regard to their spending, which could affect CVS stock value in future quarters.

Retail pharmacies are taking a hit on in-store, non-drug items as the current economic recession continues to drag. Non-drug items like groceries, photo finishing and the like account for more than one half of a typical pharmacy’s profit. Last week, Walgreen posted its second consecutive monthly drop in same-store sales, with January falling 1.1 percent, while smaller Rite Aid Corp’s (RAD.N) same-store sales have fallen for eight months in a row.

CVS had no new comments about the U.S. Federal Trade Commission’s investigation into some of its business practices, which followed its acquisition of Caremark.

CVS and Walgreens have recently launched retail medical clinics in many of their locations to participate in insurance company networks that pay benefits on individual and group health insurance plans when walk-in, immediate care clinics are used for routine medical care. The clinics were very popular during the recent U.S. H1N1 Flu outbreak when vaccines were made available at CVS, Walgreens and other retail drug chains.

A study issued last week by labor consortium Change to Win, which pushed for the FTC to examine the CVS and Caremark merger, said CVS charges the U.S. government more for some generic drugs than participants in its retail generic discount program pay. Denton, who called the report “a lot of rhetoric,” said the government is pleased with CVS’s pricing and service. Other major mail order pharmacy programs have since revised their pricing structures, offering similar discounts on refills regardless of whether a generic is substituted for a name brand prescriptions.

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