Q: Can my shares of CVS Caremark Corp. continue to do well? — PF, via the Internet

A: This hybrid drugstore chain and pharmacy-benefit management company had its share of problems in 2009.

For example, it lost billions of dollars in contracts from Medicare deals in New Jersey and Ohio, as well as business from companies such as Chrysler and Coventry Health Care. Drug-store giant CVS became a significant force among third-party administrators of prescription drugs when it bought Caremark in 2007. Yet the deal hasn't increased business, and there is some concern that the two lines - retail store versus mail-order sales - don't mix.

To try to alleviate those problems, Per G H Lofberg of Generation Health Inc. has been named president of the pharmacy-benefit management business. Lofberg was co-founder of a venture capital business spun off by Merck & Co. to became Medco Health Solutions Inc., the leading pharmacy benefit management company.

CVS Caremark also recently won an extension of a two-year contract with the Teacher Retirement System of Texas, worth about $1 billion, to provide pharmacy benefits for two years.

Shares of CVS Caremark (CVS) were up 13 percent in 2009, compared to a 27 percent decline the year before. While third-quarter profits were up 39 percent, it expects operating profits may decline 10 to 12 percent this year due to lost contracts.

The Federal Trade Commission is investigating some CVS Caremark practices, though antitrust laws are not involved. The company recently agreed to pay $875,000 to settle a lawsuit filed by New York state's attorney general over sales of expired non-prescription drugs and food products. The Change to Win coalition of labor unions has blamed the company's business model for problems such as violation of patient privacy. Consensus analyst recommendation on CVS Caremark is "buy", according to Thomson Reuters, consisting of eight "strong buys", 10 "buys" and four "holds".

Benefiting from the strong cash flow that has fueled its acquisitions, CVS Caremark operates more than 7,000 retail pharmacies and more than 500 retail health clinics. It fills or manages more than a billion prescriptions a year.

The difficult economy and fierce competition in both the drug-store chain and benefit management businesses mean the company must remain ever-vigilant.

Health reform holds additional risks for the firm.

Earnings are expected to increase six percent in 2010 and the five-year annualised return is projected to be 12 percent.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N Central Avenue, Suite 302, Phoenix, Arizona 85004-1248, or by e-mail at andrewinvaol.com

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