CVS stock plunges on lost PBM contracts

(Updated, 2:50 p.m.)

WOONSOCKET – CVS Caremark Corp. saw its stock price fall as much as 24 percent Thursday morning, the most in eight years, after the company said it lost $3.7 billion in pharmacy-benefit management (PBM) contracts during the third quarter.

CVS CEO Thomas Ryan told investors the PBM business, which negotiates drug prices on behalf of companies and governments, lost more customers than expected from July through September and is likely to see its margins shrink by as much as 12 percent next year, Bloomberg News reported.

Ryan disclosed the PBM client defections in a conference call with investors about two hours after CVS reported that its overall third-quarter profit rose 39 percent to top $1 billion.

CVS had earlier forecast that its PBM earnings would post single-digit growth next year, “which is not going to happen,” Ryan said, according to Dow Jones Newswires. “We lost more PBM business than we expected.”

CVS estimates it has lost a total of $4.8 billion in PBM contracts for 2010 since the start of this year, including a $1 billion contract with the state of New Jersey and a $500 million agreement with Ohio’s government, Ryan said.

The company has reduced prices in an effort to stem the tide, Ryan said, noting that some contracts were lost because of poor service and high costs.

Ryan also said the PBM division’s problems would likely prevent the company from meeting its previously announced 2010 target of 13 percent to 15 percent growth in earnings per share.

The news sent CVS stock down as much as 24 percent, its biggest intraday decline since 2001, in morning trading on the New York Stock Exchange. The shares had recovered somewhat to $28.62, down 21 percent, at 2:50 p.m.

Ryan said he will temporarily take over the PBM business from executive vice president Howard McLure, who is retiring, while the company searches for a new leader. “We’re committed to turning around the PBM business,” Ryan said.

CVS entered the PBM business with its $22 billion purchase of Caremark Rx Inc. in 2007.

“We’ll be watching carefully who they pick to replace McClure,” Jason Pride, director of research at Radnor, Pa.-based Haverford Investments, which owns CVS shares, told Bloomberg. “We’re not standing behind management and saying everything they have done is perfect, but we continue to believe the model they’ve created will increase returns.”

Ryan also announced that CVS has picked David Denton, its controller and chief accounting officer, to become its new chief financial officer on Jan. 1. He will replace David Rickard, who announced his retirement earlier this year.

The company’s board of directors has also approved a new buyback program to repurchase as much as $2 billion of CVS’ common stock.