Medco Health Solutions Inc. will lose a major pharmacy benefit contract to CVS Caremark Corp. starting next year, sending Medco shares down almost 11 percent and CVS up nearly 4 percent Friday.
Medco was notified on Thursday that the Blue Cross Blue Shield Association intends to move its mail order and specialty pharmacy benefit coverage for the Federal Employee Program, Medco said in a securities filing.
CVS, which has been administering FEP's retail pharmacy benefit management program since 1993, will add the mail-order and specialty pharmacy services, it said in a press release.
The FEP contract, which Wall Street watches closely, generates nearly $3 billion in annual revenue, including about 9.8 million mail order prescriptions, Medco said.
It represents less than 10 percent of its estimated 2011 earnings, Medco said. However, the company said the expiration of the contract would not hurt results this year because it runs through the end of 2011.
"We're disappointed that they have chosen to go in a different direction, but we look forward to the opportunity to service them in the future," Medco spokeswoman Jennifer Luddy said.
Medco Chief Executive Officer David Snow had expressed confidence at the Reuters Health Summit earlier this month that the company was well-positioned to retain the contract.
Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies.
CVS has had a rocky history with its PBM business after buying Caremark for $27 billion in 2007. Late in 2009, the PBM lost $4.8 billion in contracts heading into the new year, and the president of the unit left.
At the same time, CVS disclosed that the Federal Trade Commission was investigating some of the combined company's business practices, leaving questions about whether the merger made sense.
CVS said earlier this month that it had no plans to split up its operations, even though the Caremark part of the business has been a drag on overall profitability.
Shares of CVS were up 3.8 percent at $39.60 in premarket trading, while Medco fell 10.8 percent to $57.50.
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