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CVS kicks the habit, dropping tobacco products

In a move hailed by President Barack Obama, CVS Caremark said Wednesday it is getting out of the business of selling cigarettes, a decision that will cost its retail division $2 billion in annual sales.

"We made this decision as a business decision because we are positioning ourselves as a health-care company," said Helena Foulkes, CVS/pharmacy president.

The company, the nation's second-largest drugstore chain, has increasingly positioned its pharmacies as a health-care resource, with 750 retail clinics nationally located in its stores. But beyond its retail pharmacies, CVS Caremark's pharmacy benefit division contracts with large employers and health insurers to provide drug coverage.

(Read more: Big tobacco: Sorry. So, can we grow now? )

"Increasingly, we have clients and health plans and health system partners who are seeing us as an extension of their health-care services," Foulkes said. "We know that the sale of tobacco is extremely inconsistent with being a health-care provider."

CVS is the first major pharmacy retailer to voluntarily stop selling tobacco products.

In a statement, Obama said he applauds the decision and said it "will have a profoundly positive impact on the health of our country."

"As one of the largest retailers and pharmacies in America, CVS Caremark sets a powerful example, and today's decision will help advance my Administration's efforts to reduce tobacco-related deaths, cancer, and heart disease, as well as bring down health-care costs—ultimately saving lives and protecting untold numbers of families from pain and heartbreak for years to come," Obama said.

The industry has been under pressure to stop from state and local governments, with some communities instituting cigarette sales bans at pharmacies. They've also been pressured by the pharmacists themselves.

"We welcome CVS/Caremark's commitment to health and wellness and its promise to remove tobacco products from their stores," Steven T. Simenson, president of the American Pharmacists Association, said in a statement. "As pharmacists step up to provide care to their patients, we cannot continue to sell known health hazards in our pharmacies"

The association four years ago called on drugstores and retailers that include pharmacies to stop selling tobacco, and urged state boards not to license pharmacies in outlets that sell tobacco.

Fuse | Getty Images

"I think they see the hypocrisy of selling cigarettes, while promoting pharmacies nowadays as real partners in health care," said Tom McCaney, associate director of corporate social responsibility for the Sisters of St. Francis of Philadelphia.

(Read more: WellPoint says exchange enrollment ahead of plan)

The Sisters of St. Francis has lobbied Walgreen's, the nation's leading drugstore chain, to stop selling cigarettes. At one point, the nuns pushed for a shareholder vote on the issue. McCaney said the retailer has been receptive to dialogue, but hasn't made any promises.

"They're afraid in a highly competitive industry that if they stopped selling cigarettes, their competitors will take up the slack," he said. "Their justification is it gets people in the store."

In a statement released Wednesday, Walgreen said, "We have been evaluating this product category for some time to balance the choices our customers expect from us, with their ongoing health needs. We will continue to evaluate the choice of products our customers want, while also helping to educate them and providing smoking cessation products and alternatives that help to reduce the demand for tobacco products."

Rival Rite Aid echoed Walgreen's response, saying, "We continually evaluate our product offering to ensure that it meets the needs and interests of our customers."

CVS calculates it will lose $1.5 billion in direct tobacco revenues annually, and $500 million in ancillary sales from products customers buy when they purchase cigarettes. That represents about 3 percent of its retail division's annual sales in 2012.

The company couldn't comment on the percentage of sales in 2013 because it isn't expected to report those results until Feb. 11.

"We're not going to be recouping all of those revenues, but we will be able hold our earnings consistent," said Foulkes. "At the end of the day, we've made this decision because it's the right thing for us."

Prior to implementing its ban, CVS did not sell e-cigarettes, which vaporize nicotine and are not regulated as a tobacco product by the Food and Drug Administration.

In response to questions on Twitter, the retailer said, "We don't sell them and we are continuing to monitor what the FDA decides in regard to these products."

The FDA is currently weighing proposed regulations for e-cigarettes due to the "highly addictive" nature of nicotine.

(Read more: US surgeon general call for end of tobacco epidemic)

A CVS store in San Francisco, California.
Getty Images
A CVS store in San Francisco, California.

It remains to be seen whether CVS's rivals will follow their lead on the tobacco ban or try to poach their customers.

"We certainly expect other people who are in the pharmacy business to look in the mirror themselves and ask themselves, 'Where do they want to be in the next few years?'" she said.

(UPDATED: This story was updated to discuss the treatment of e-cigarettes as well as with responses from Walgreen and Rite Aid.)

—By CNBC's Bertha Coombs. Follow her on Twitter @berthacoombs.

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