CVS' Pharmacy Benefit Struggles Renew Merger Benefits Debate
By Kelly Nolan, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- CVS Caremark Corp.'s (CVS) so far disappointing 2010
pharmacy benefits selling season dismayed investors Thursday, renewing concerns
about combining a retail drug store and a pharmacy benefits manager.
The 2007 combination, valued at $27 billion, was seen as a natural fit,
bringing together two leaders in their respective sectors. However, since the
merger, the Caremark pharmacy benefits business has struggled against its pure-
play peers--which some blame on CVS' failure to market that business
effectively--although the company's retail operations have benefited.
"CVS Caremark is struggling to explain to customers the benefit of a retail
and pharmacy management business together," said Adam Fein, president of
Pembroke Consulting and author of a blog called Drug Channels.
Pharmacy benefit managers, or PBMs, handle prescription-drug benefits for
employers and other groups, selling their ability to reduce health-care costs
through discounts and programs to help patients adhere to treatments.
Thursday, CVS surprised investors by saying that the company had some "big
client losses" in its Caremark business for next year's season, noting those
losses were greater than previously expected. The comments took the sheen off
CVS' better-than-expected third-quarter earnings Thursday including profit up
39% and revenue gains. Company shares are up 0.3% to $28.96 in late trading from
the Thursday close of $28.87, when they had fallen 20.1%.
Chief Financial Officer David Rickard said investors are overreacting to the
comments on the 2010 PBM selling season and the resulting financial
implications. Most of the $4.8 billion in net contract loss for next year comes
from just a few big contracts, he said.
"We have a situation where we have a fair amount of success attracting and
renewing business," Rickard said in an interview. "Then we had some serious
losses that changed the financial outlook for the PBM part of the business."
He added, "People are rightfully concerned about the financial progress this
implies, but I think they have allowed that to bleed over into a perception
there's something strategically amiss," when that's not the case.
Rickard admitted that when CVS and Caremark combined, "we didn't do enough to
reassure customers that the basic PBM services would be there...We were so
focused about all the new exciting things we could do."
Corporate benefit consultants have complained that CVS Caremark
representatives had talked too much about the CVS drug-store chain and not
enough about the Caremark PBM offering. CVS took measures about a year ago to
refine their messaging, Rickard said, although "feedback we're getting [now]
from customers tells us that there's further opportunity to make that messaging
even more direct."
The miscommunication likely contributed to Caremark losing contracts to PBM
rivals including Medco Health Solutions Inc. (MHS), consultants have said. CVS
this year lost its $1 billionCoventry Health Care Inc. (CVH) account to Medco,
and New Jersey awarded a state employee and retiree contract to Medco, which
also won the Chrysler-UAW union retiree account that Caremark had served.
Medco said Wednesday that it had a client retention rate of 99%, while CVS
posted a rate of 92%.
"We continue to believe that the melded model (PBM and drugstore) does not
create added value," BMO Capital Markets analyst Dave Shove said. "Massive
contract losses send a similar message from benefit managers."
He added, "We are skeptical regarding a speedy restoration."
CVS said its PBM operating profit may decline as much as 12% in 2010;
previously, CVS had expected PBM operating profit growth in low to mid single
digits. The reversal forced CVS to retreat from its hopes for at least 13% to
15% growth in the company's total per-share earnings next year.
To revitalize its Caremark business, CVS announced some management changes
this week. The company hired Len Greer, a 20-year marketing industry veteran, to
serve as its new senior vice president of marketing for the PBM business. Greer
replaces Jack Bruner, who is moving into the new role of executive vice
president of strategic development.
Also, Caremark President Howard McLure will retire, effective Nov. 27, with
Chief Executive Thomas Ryan taking his place until a replacement is found.
Despite Caremark's struggles, the merger has helped CVS' retail business
because of programs like Maintenance Choice, which allows Caremark customers to
pick up 90-day prescriptions at stores for the same price as mail.
"CVS [retail] pharmacy has been a winner from this combination, while Caremark
has suffered," Fein said. "They are going to have to think about how to make the
value proposition compelling from a managed-care perspective versus a retail
merchant's perspective."
-By Kelly Nolan, Dow Jones Newswires; 212-416-2167; kelly.nolan@dowjones.com
(END) Dow Jones Newswires
11-05-091646ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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