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Merlo puts stamp on his leadership in fourth-quarter earnings call

Incoming CEO discusses initiatives

WOONSOCKET, R.I. — What will define success for CVS Caremark in the years ahead? If you ask incoming CEO Larry Merlo, it all comes down to three things: flawless execution, cross-functional thinking and management, and enhancing value. Not coincidentally, those are three key reasons Merlo inherited the top spot at the company.

With its arsenal of products and services aimed at driving adherence and reducing healthcare costs, and a robust management team at the helm, CVS Caremark is well positioned for continued growth and success in the years ahead. That was a key message that incoming CEO, Larry Merlo, had for analysts during Thursday's fourth-quarter conference call.

"We certainly have the right assets in place to continue to be a very successful company for years to come, and that is a real credit to [Tom Ryan's] vision of the future of pharmacy health care. Throughout his tenure, Tom has built a culture that is focused on innovation, customer service and flawless execution, and I certainly look forward to building upon his legacy," Merlo said.

As previously reported by Drug Store News, Merlo, president and COO, officially will assume the role of CEO on March 1. Ryan, chairman, president and CEO, will remain nonexecutive chairman until his retirement at the company's annual meeting of shareholders in May. At that time, David Dorman, who has been on the CVS Caremark board since 2006, will be elected nonexecutive chairman.

"I'm confident in our management team, the assets we have in place and the future of CVS Caremark. Following more than three decades with our company, I can retire with great confidence in the future and know that we are extremely well positioned to play an important role in the evolving U.S. healthcare market, and to generate strong growth and returns to our shareholders," Ryan told analysts during the call.

Signifying Merlo's upcoming role with the nearly $100 billion company, Merlo largely steered the conference call, providing analysts an overview of fourth-quarter and full-year results, as well as a glimpse of his top priorities as the new CEO.

Merlo indicated that under his watch, three things will define the company's future success:

  • Flawless execution of its strategy, which is lowering healthcare costs while improving the health of its consumers and leveraging its integrated pharmacy services model;

  • Stressing more cross-functional thinking and action across the company, producing even higher levels of customer service; and

  • Enhancing value for all of its shareholders in such ways as improving dividend payouts and share repurchases.

Much of the focus on Thursday's call also surrounded the company's PBM business, which posted a 9.7% decrease in revenues to $12.2 billion for the quarter, compared with the prior-year period. Adjusting for the impact of new generics, net revenues would have declined by 2.4% in the segment. The decrease in net revenues primarily was due to the previously announced termination of a few large client contracts, effective Jan. 1, 2010, as well as the decrease of covered lives under its Medicare Part D program, resulting from the 2010 Medicare Part D competitive bidding process.

While acknowledging that profit pressures face the PBM business, Merlo expressed optimism and stressed that the company is taking the necessary steps to ensure long-term financial success in the PBM business. Year 2011 is the year the company will break trends on top-line growth in the PBM, and 2012 is expected to be the year it breaks trends on profit growth, Merlo said.

"There are many reasons for optimism about our PBM's long-term prospects, starting with its performance in 2012. First and foremost, 2012 is expected to be the strongest year in generic [drug] launch history; second, the streamlining benefits will begin to outweigh our investment costs; third, we will see a ramp up in accretion from the Aetna contract; fourth, we anticipate continued growth in both specialty and the Medicare Part D businesses; and fifth, our focus on client service and satisfaction, along with our innovative products and services, will provide continued momentum in renewal and new sales success," Merlo told analysts.

It should be noted that CVS Caremark's previously announced agreement to acquire the Medicare Part D business of Universal American not only will more than double the size of CVS Caremark¹s Medicare Part D program, but the move also comes just as the first baby boomers turn 65 years old.

Merlo noted the company is focused on driving top-line growth in the PBM through, for example, continued market share gains, strong client retention, a keen focus on such high-growth sectors as specialty and identifying additional opportunities for high-return, bolt-on acquisitions. There also is a focus on shifting the mix to higher-margin areas of the PBM, such as the 90-day mail choice program, which is comprised of both traditional mail order and Maintenance Choice.

Through a PBM streamlining initiative, the company expected to generate more than $1 billion in savings through 2015. "This initiative is broad-reaching and very important to the PBM's future profitability, and there are many similarities to what we have accomplished integrating and consolidating the retail acquisitions we have done," Merlo said. "We are applying many of those processes to this streamlining effort."

However, that's not to say that the front of the store is not of great importance, as evidenced by the continued focus on and success of the company's ExtraCare loyalty program, which has been expanded with the new ExtraCare Beauty Club, the rollout of some 1,100 new private-label items, the completion of more than 200 Urban remodels in the past year and the implementation of the expanded consumables planogram in nearly 4,000 stores.

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