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.

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.

The company's pharmacy same-store sales in the latest quarter were hurt due to recent introductions of generic drugs. While CVS and other drugstore chains are expected to benefit from a wave of generics coming to market, CVS has warned that the initial limited supply of Lipitor and other drugs will keep costs high for several months. Generics have increasingly hit the market in recent years, but 2012 will see the greatest impact yet as more than $30 billion in drugs lose patent protection.

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.

Shares were up 0.7% to $43.36 in recent trading.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

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