Nov. 5 (Bloomberg) -- CVS Caremark Corp. posted its biggest stock drop in eight years after saying its unit for managing pharmacy benefits lost $3.7 billion in contracts and disclosing that antitrust regulators are probing some business practices.

The division, which negotiates drug prices with manufacturers for corporate and government customers, lost more business than anticipated, CVS Chief Executive Officer and Chairman Tom Ryan said on a conference call today. The company, based in Woonsocket, Rhode Island, forecast margins and operating profit at the pharmacy-benefits management unit will shrink by 10 percent to 12 percent in 2010.

Ryan said he will take over the business from executive vice president Howard McLure, 52, who is retiring, until a new leader is found. The $3.7 billion in lost contracts during the third quarter brings this year’s total to $4.8 billion. CVS has cut contract prices at the unit as it seeks to lure new customers and retain existing ones.

“We’ll be watching carefully who they pick to replace McClure,” said Jason Pride, director of research at Haverford Investments. “We’re not standing behind management and saying everything they have done is perfect, but we continue to believe the model they’ve created will increase returns.”

Haverford, based in Radnor, Pennsylvania, oversees about $6 billion in assets including CVS shares.

CVS, the largest U.S. provider of prescription drugs, fell $7.28, or 20 percent, to $28.87 at 4:15 p.m. in New York Stock Exchange composite trading for its biggest decline since 2001. The shares had gained 26 percent this year through yesterday.

Union Pressure

The Federal Trade Commission confirmed it is probing the company, without providing details. CVS is confident it conducts business in compliance with antitrust laws, Chief Financial Officer David Rickard said today in an e-mailed statement.

CVS entered the PBM business in 2007 with the purchase of Caremark Rx Inc. for about $22 billion. Earlier this year, members of Congress asked the FTC to investigate whether that merger hurt consumers after similar concerns were raised by Change to Win, a 6 million-member union federation.

Change to Win said in September it met with FTC Chairman Jon Leibowitz and alleges CVS overcharges consumers, sells private customer data and favors higher-priced drugs in order to collect manufacturer rebates. CVS denies those assertions.

Contract Losses

Earlier today, CVS reported third-quarter profit rose 39 percent, better than analysts estimated, helped by a jump in PBM sales. Almost two hours later on the conference call, Ryan disclosed the contract losses and outlook for the unit, sending the shares down in early trading.

CVS lost a contract with the state of Ohio valued at $500 million because of a regulatory issue, Ryan said. The company also lost a $1 billion contract for the state of New Jersey’s Blue Cross Blue Shield, he said. Price and service were reasons for some of the losses, he said.

“We’re committed to turning around the PBM business,” he said on the call.

CVS fills or manages more than 1 billion prescriptions a year through its retail stores, mail-order business and the Caremark pharmacy benefits manager. Net income in the third quarter advanced to $1.02 billion, or 71 cents a share, from $732.5 million, or 50 cents, a year earlier.

Excluding some items, earnings were 65 cents a share, compared with the 64-cent average of analysts’ estimates compiled by Bloomberg. Sales climbed 18 percent to $24.6 billion, in line with estimates.

CVS also said today comptroller David Denton will be its new chief financial officer starting Jan. 1. He replaces Rickard, who announced his retirement earlier this year.

The company announced a new program to repurchase as much as $2 billion in outstanding stock.

Profit excluding some items will be $2.61 to $2.64 a share this year, the company said. Its previous forecast was $2.59 to $2.64. Eighteen analysts estimated full-year profit of $2.62 on average.

To contact the reporter on this story: Carol Wolf in Washington at cwolf@bloomberg.net.

Last Updated: November 5, 2009 16:22 EST