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UPDATE 2-CVS becomes first big U.S. drugstore chain to drop tobacco

Feb 5 (Reuters) - CVS Caremark Corp said on Wednesday that it would stop selling tobacco products at its 7,600 stores by October, becoming the first national drugstore chain in the United States to take cigarettes off the shelves.

Public health experts called the decision by the No. 2 U.S. drugstore chain a precedent-setting step that could pressure other retailers to follow suit. It comes at a time when pharmacies are taking on a much bigger role in healthcare.

President Barack Obama, a former smoker, praised the move, saying CVS had set a powerful example.

"Today's decision will help advance my Administration's efforts to reduce tobacco-related deaths, cancer, and heart disease, as well as bring down healthcare costs," Obama said in a statement.

CVS, whose Caremark unit is a major pharmacy benefits manager for corporations and the U.S. government's Medicare program, said the decision would strengthen its position as a healthcare provider.

Pharmacists have had a long tradition of being a source of community health information, a tradition drugstore chains have embraced by putting walk-in clinics in their stores.

CVS started its MinuteClinic retail health centers in 2000 and is now the largest U.S. pharmacy healthcare provider, with more than 800 locations across 28 states and the District of Columbia.

"I think CVS recognized that it was just paradoxical to be both a seller of deadly products and a healthcare provider," U.S. Centers for Disease Control and Prevention Director Thomas Frieden told Reuters.

CVS Caremark Chief Medical Officer Dr. Troyen Brennan said in an opinion piece he co-authored in the Journal of the American Medical Association that the increased health coverage available through the U.S. Affordable Care Act "comes with a price," that of promoting public health.

Some U.S. cities, including Boston and San Francisco, already ban the sale of tobacco products in pharmacies, but nonsmoking advocates hope the voluntary move by CVS will have a ripple effect across other drugstore chains.

Walgreen Co, the largest pharmacy chain, and third-ranked Rite Aid Corp said they would still sell cigarettes for now but would continue to evaluate the product category.

Wal-Mart Stores Inc, which is the world's largest retailer and sells cigarettes, declined to comment.

Some retailers stopped selling cigarettes years ago: Target Corp decided to drop them in 1996, while East Coast supermarket chain Wegmans Food Markets did so in 2008.

But being the first retail pharmacy chain to publicly ban tobacco products gives CVS a major advantage as a leader in the growing health and wellness trend.

"This is a trend we're going to see many, many retailers and food companies jump on," said Alexandra von Plato, president and global chief creative officer of Publicis Healthcare Communications Group.

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said CVS's announcement could help lead more people to quit smoking.

Although adult smoking rates have fallen from 43 percent of Americans in 1965 to 18 percent currently, the habit remains the leading cause of preventable death in the United States, killing more than 480,000 people each year.

Last month, the American Lung Association and other advocacy organizations called on political leaders to commit to cutting smoking rates to less than 10 percent of the population in a decade and to protect all Americans from secondhand smoke within five years.

SMALL FINANCIAL IMPACT

CVS said the decision would not make a big dent in its financial results. The move will cost the company about $2 billion in annual sales and 6 cents to 9 cents in profit per share this year. Analysts expect 2014 revenue of $132.9 billion and earnings of $4.47 per share, according to Thomson Reuters I/B/E/S.

Declining smoking rates, along with new competition in the last two years from the low-cost Family Dollar Stores Inc and Dollar General Corp chains, suggest prospects for tobacco product sales were shrinking at CVS. Dollar stores have far more locations and offer goods at lower prices.

U.S. cigarette sales fell 31.3 percent between 2003 and 2013, according to Euromonitor International.

"We believe the move will be viewed as a positive long-term decision by CVS, despite the near-term profit drag, as it paves the way for increased credibility with both healthcare consumers and payers," ISI Group analyst Ross Muken wrote in a note.

CVS's decision follows several recent deals bolstering the company's position in the healthcare market.

In December, CVS said it expected its pharmacy benefit manager revenue to rise between 7.25 percent and 8.5 percent in 2014, easily outpacing growth of 2 percent to 3.25 percent in its retail business.

Also in December, CVS and pharmaceuticals distributor Cardinal Health Inc announced a 10-year agreement to form the largest generic drug sourcing operation in the United States. A month earlier, CVS said it was buying Coram LLC, Apria Healthcare Group Inc's specialty infusion services business.

CVS said it would replace some of lost cigarette sales through smoking cessation programs at its pharmacies and through Caremark. The company said the programs would be also be a key selling point as it tries to land more corporate contracts this year.

Tobacco companies, meanwhile, shrugged off the announcement.

"It's up to retailers to decide if they're going to sell tobacco products," said Altria Group spokesman Brian May. Altria, whose brands include Marlboro, accounts for 46.5 percent of the U.S. cigarette market.

David Howard, a spokesman for Camel and Pall Mall cigarette maker Reynolds American Services, said: "We value the long-term relationship we had with CVS and respect their commercial decision."

Shares of Altria, Reynolds American and CVS were down about 1 percent in midday trading.

RBC Capital Markets analyst Nik Modi said he expected little impact on tobacco companies, with more than 75 percent of sales coming from convenience stores and only a small portion from drugstores.

What's more, Modi said, consumers will probably just go elsewhere to buy cigarettes.

But Dr. Richard Wender of the American Cancer Society said CVS's move would have an effect.

"Every time we make it more difficult to purchase a pack of cigarettes, someone quits."

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