2nd UPDATE: CVS Caremark 4Q Net Up 3.7%; Lifts Full-Year Outlook

CVS Caremark Corp.'s (CVS) fourth-quarter profit rose 3.7% as pharmacy services and retail revenue each grew, though results were tempered by weaker-than-expected holiday sales and a muted flu season.

CVS raised its full-year earnings guidance by 3 cents a share, as the company anticipates a greater-than-expected benefit from business being driven away from rival Walgreen Co. (WAG) due to its impasse with pharmacy-benefits manager Express Scripts Inc. (ESRX).

President and Chief Executive Larry Merlo told analysts during the company's conference call that while the dispute between Walgreen and Express Scripts didn't materially boost the latest quarter's results, "we are seeing a significant number of transfers" in the current quarter. CVS has launched marketing and in-store investments to court influx customers.

Merlo said CVS is gaining "more than our fair share" of the business Walgreen lost, though he cautioned the rosier view didn't incorporate further gains later this year, as he said an agreement could be reached at any time. Walgreen allowed a contract with Express Scripts to expire at the end of last year due to a rate dispute.

When asked about CVS's ability to retain new customers if Walgreen and Express Scripts were to reach an agreement, Merlo struck an upbeat tone, saying "we know that the pharmacy customer is the hardest person to lose, but once you lose them, it's the hardest person to get back."

He added as the impasse continues, CVS would have an opportunity to refill a prescription a few times and give the customer an opportunity to get to know the pharmacist and store's staff.

The news comes after Walgreen last week reported same-store sales slid 4.6% in January, a greater decline than analysts expected, as prescription sales were battered by the loss of Express Scripts. Walgreen's management has said it expected January would be hurt the most from the loss of that business, though Walgreen contends it will see improvement as the year progresses.

CVS's shares ended last year with a 17% gain, exceeding the broader market's growth and far better than the 15% drop for Walgreen, as investors and analysts praise the company's integration of pharmacy-benefits manager Caremark. CVS has touted the success of its MinuteClinic retail health-care centers and observers are banking on the CVS benefiting from the contract expiration between Walgreen and Express Scripts.

In the latest quarter, revenue in the company's pharmacy services segment jumped 32%, again boosted by a contract with Aetna Inc. (AET) as well as an acquisition of a Medicare prescription drug business last year. On the retail side of the pharmacy business, sales were up 4% as same-store sales climbed 2.5%.

CVS reported a profit of $1.06 billion, or 81 cents a share, up from $1.03 billion, or 75 cents a share, a year earlier. Adjusted earnings from continuing operations, which excludes such items as tax benefits, rose to 89 cents a share from 79 cents.

Revenue jumped 15% to $28.32 billion.

In November, CVS predicted earnings of 87 cents to 91 cents a share and total sales growth of 13% to 15%.

Gross margin narrowed to 19.6% from 22.2%.

Chief Financial Officer David Denton said margins were hurt by holiday promotions, the growth of Maintenance Choice and pressure from pharmacy reimbursement rates. Weaker-than-expected holiday sales and a muted flu season were also factors, as those categories often carry a higher margin.

Despite a weak flu season, the company's MinuteClinic retail health-care centers posted 40% revenue growth as CVS continues to add new services and raise awareness. In one example, Merlo said CVS launched a marketing campaign to capitalize on a new Texas law requiring college students be vaccinated against meningitis before school began in January, resulting in a jump in vaccinations.

CVS estimated first-quarter adjusted earnings of 61 cents to 63 cents a share, compared with analysts' forecasts of 61 cents, according to Thomson Reuters.

For the full year, CVS now forecasts adjusted per-share earnings from continuing operations of $3.18 to $3.28, up from the December view of $3.15 to $3.25.

Separately, a CVS spokeswoman said a federal court on Tuesday granted a temporary restraining order to allow two Florida pharmacies to continue filling prescriptions for certain controlled drugs after the Drug Enforcement Administration took action on Saturday to halt such sales. The DEA's actions against two Sanford, Fla., CVS stores is related to the agency's allegations that four pharmacy customers of drug distributor Cardinal Health Inc. (CAH), including these CVS outlets, dispensed the pain drug oxycodone based on bad prescriptions.

While CVS will resume filling prescriptions at the two locations, it offered to not dispense oxycodone and other so-called Schedule II controlled substances at the two stores until the case is resolved.

Shares were up 1.7% to 43.82 in recent trading.

-By John Kell, Dow Jones Newswires; 212-416-2480; [e-mail]