CVS Caremark posts higher 1st-quarter profit

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CHICAGO (Reuters) - CVS Caremark Corp <CVS.N> posted higher quarterly profits in line with analysts' estimates on Thursday, as the addition of Caremark's pharmacy benefits business helped offset the impact of lower-priced generic drugs on drugstore sales.

By Brad Dorfman

CHICAGO (Reuters) - CVS Caremark Corp <CVS.N> posted higher quarterly profits in line with analysts' estimates on Thursday, as the addition of Caremark's pharmacy benefits business helped offset the impact of lower-priced generic drugs on drugstore sales.

The company, which operates one of the largest U.S. drugstore chains, also said it saw no evidence that the weak U.S. economy is hurting sales of discretionary items at its stores. There had been some concern that drugstore industry sales would remain weak after a soft Christmas season.

"Consumers are making tough choices on big-ticket purchases, but they aren't yet focused on Snickers bars," Chief Financial Officer David Rickard said during a conference call with analysts.

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Rickard also said the company did not see evidence that consumers were breaking their prescription pills into smaller doses or taking other money-saving measures that would indicate an impact from the economy.

First-quarter profit rose to $745 million, or 51 cents a share, from $405.4 million, or 43 cents a share, a year earlier. The results matched the analysts' average forecast, according to Reuters Estimates.

Quarterly net revenue rose to $21.3 billion from $13.2 billion.

CVS bought Caremark in March 2007, allowing it to increase its prescription benefits business and mail-order operations. CVS and rival Walgreen Co <WAG.N> had been expanding beyond the traditional drugstore industry to get a larger part of the then-growing U.S. health-care market.

Sales at drugstores open at least a year rose 3.9 percent. Prescription sales increased 3.7 percent. Increased sales of lower-priced generic drugs cut that percentage increase by 4.5 percent, the company said. But while generic drugs cost less for drugstores and consumers, they are more profitable for drugstores.

"We see improved product mix, well-controlled promotional spending and increased generic drug dispensing rate continuing to drive retail pharmacy margins," Joseph Agnese, drug retail analyst at Standard & Poor's Equity Research, said in a research note.

"Front end" sales, or sales of general merchandise such as shampoo and cosmetics, rose 4.3 percent.

"If there was a surprise, it's that they are not seeing a negative impact on the front end," said Sarah Henry, retail analyst at MFC Global, which holds 400,000 CVS shares.

She said the company has shown it is able to gain market share while also cutting costs.

For the second quarter, the company forecast revenue growth of 3 percent to 5 percent. It expects earnings per share of 55 cents to 57 cents on a reported basis, while analysts on average forecast 57 cents, according to Reuters Estimates.

The company said front-end sales at stores open for a least a year fell 0.2 percent in April, due to the shift of the Easter holiday to March this year.

For the full year, CVS forecast earnings per share of $2.27 to $2.33, compared with analysts' estimates of $2.32, with same-store sales growth of 4 percent to 7 percent.

Rickard said the company had signed 30 new clients in the pharmacy benefits business, with first-year revenue expected to total $3 billion. Most of the contracts begin in January 2009.

CVS also got renewals for more than half of the current contracts that were coming due, he said. About one-third of the company's pharmacy benefits business comes up for renewal each year, he said.

Analysts are closely watching renewal rates and new business trends to see whether there is any impact from the acquisition of Caremark by CVS.

CVS shares were up 20 cents, or 0.5 percent, at $40.57 on Thursday afternoon on the New York Stock Exchange.

(Reporting by Brad Dorfman and Martinne Geller; Editing by Gerald E. McCormick and Lisa Von Ahn)