WOONSOCKET, R.I. —CVS Caremark announced in early April that it has been awarded the consolidated AT&T pharmacy benefit management contract, a move that eased investors’ minds and speaks to the efficacy of its combined business model.
“This consolidation reflects Caremark’s longstanding close relationship with AT&T, the ability to secure better pricing by combining the business and the promise of the CVS Caremark model,” stated Goldman Sachs analyst John Heinbockel. CVS will retain the old AT&T part of the contract and now pick up the old BellSouth piece.
Effective Jan. 1, 2009, CVS Caremark will provide a suite of integrated pharmacy services, including claims processing, network management, rebate contracting, mail order pharmacy and specialty pharmacy services. According to Lehman Brothers analyst Meredith Adler, the contract totals about $1.25 billion, with mail accounting for two-thirds of revenue and retail accounting for the other one-third.
“We expected CVS to renew the mail portion of the contract—it has had this business for some time, there is stickiness with this type of account and CVS’ unique retail/PBM model has great promise,” stated Heinbockel. “We were unsure about the likelihood of the contract’s expansion into the retail side of the business.”
According to Adler, AT&T was interested in CVS Caremark’s ability to assist in driving improved drug therapy compliance and persistence through closer patient interaction, and CVS has been working with AT&T over the last few months to test several pilot programs.
Analysts estimate that the incremental revenue will be about $350 million. CVS has now won new business of roughly $1 billion this selling season.
Added Adler, “While we estimate the impact to earnings from the total contract to be only about 2 cents to 3 cents, we believe AT&T’s desire to work with CVS demonstrates that payers are beginning to appreciate the value of the company’s combined model.”