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CVS Caremark turns to innovation 
to capture a growing healthcare market


With healthcare reform on track to bring 32 million more Americans into the healthcare system in 2014, and with payers and patients looking for solutions to curb costs as the nation battles a shortage of primary care physicians and access to quality care, CVS Caremark’s role in reinventing pharmacy through its distinctive business model couldn’t be more imperative than it is today.

“When you think about the business that we operate, we have a $120 billion enterprise; we have about 7,400 CVS/pharmacy stores; we operate one of the leading pharmacy benefit management companies in Caremark; and MinuteClinic … plays an important role in healthcare delivery. So, we think about those three businesses operating as best-in-class business units,” president and CEO Larry Merlo told Drug Store News in an interview earlier this year.

Take each of those business units, place them in a circle and where they overlap is what the pharmacy innovation company refers to as its “integration sweet spots” — 
essentially those products and services that no stand-alone PBM or stand-alone pharmacy retailer can provide to its clients, members or customers. It’s those “sweet spots,” a top-notch leadership team, and a robust network of pharmacy and retail clinic locations that is helping to further catapult the company from its roots as a go-getting New England-based regional player to the pharmacy healthcare giant that it is today.

Merlo has talked a good deal about the integration sweet spots, and the results are clearly demonstrating success and resonating not only with patients and payers, but also with Wall Street.

CVS Caremark has hit its stride, turning the PBM business from a decline in operating profit in the first half of 2011 to growth in the back half, and now the powerhouse is rolling out differentiated products and services (e.g., Maintenance Choice and Pharmacy Advisor) that are proving to be a success in 
the marketplace. 

“Our retail operating profit increased 18.5%. Our PBM operating profit jumped 14.3%. Both at or above our expectations,” Merlo told analysts during it second quarter conference call on Aug. 7. “So, we’re very pleased with this strong operating performance.”

Furthermore, Merlo has expressed optimism for a strong second half of the year and confidence in retaining a large portion of the prescription volume gained from the Walgreens-Express Scripts impasse. Walgreens re-entered the broadest Express Scripts network on Sept. 15.

While the company has developed a retention strategy, the reality is that, without even taking any action, it has a number of factors working in its favor: the “stickiness” of a pharmacy customer, the fact that many customers have already entrenched themselves in CVS and its convenient retail locations.

“The pharmacy customer is the hardest person to lose, but once you lose them, it is the hardest person to get back. The pharmacy transfer process is cumbersome and time-consuming, and we believe there are a large number of people who don’t want to go through that whole process a second time, especially if they have switched from one major chain to another,” Merlo told attendees of the Morgan Stanley Healthcare Conference in New York City in mid-September. “When this impasse started — while we put together an acquisition strategy — we also believe that retention strategy was equally important to have in place.”

Merlo said the company benefited from focusing on the retention component of the opportunity. For example, the company learned that 70% of those new customers live within two miles of CVS/pharmacy; 55% of those customers have enrolled in the automatic prescription refill program; and more than 83% have enrolled in the retailer’s ExtraCare loyalty program. 

Those are impressive numbers, especially as it relates to those customers who have enrolled in the ExtraCare loyalty program. It’s particularly interesting given the fact that Walgreens just rolled out in September its new Balance Rewards loyalty program.

“We believe we are going to hit a retention run-rate as we approach the end of the year. We think that those customers who will migrate back to Walgreens will do so in the first couple of months and, again, as we approach the end of the year; and perhaps early next year, we will be at the retention level of a more permanent nature,” Merlo told 
conference attendees.

In light of the impasse, CVS Caremark estimates that it will generate an additional benefit of approximately 5 cents per share in the second half of the year. That estimate assumes that, in the fourth quarter, CVS Caremark retains at least 50% of the prescription volumes gained from the impasse. In addition, the 5-cent-per-share additional benefit is net of estimated investments the company will make to maximize retention.

Given its strong results year-to-date, the company raised and narrowed its guidance for the full year. It now expects to achieve adjusted earnings per share for 2012 in the range of $3.32 to $3.38. This is up from its previous range of $3.23 to $3.33 and up roughly 15 cents from its initial 2012 guidance of $3.15 to $3.25, which it provided in December 2011 at its Analyst Day.

While the Walgreens-Express Scripts impasse did benefit both CVS Caremark’s pharmacy and front store business, there’s no doubt that it is a small — very small — slice of CVS Caremark’s strong performance.

The reality is that there’s a seismic shift taking place in the provider market fueled by such factors as healthcare reform; a physician shortage; a $300 billion annual drain on healthcare due to medication nonadherence; an alarming rise in such chronic conditions as obesity; and a “Silver Tsunami,” as it is called, whereby 10,000 baby boomers turn 65 years old every day for the next 20 years.

Refusing to wait along the sidelines for change, CVS Caremark continues to aggressively leverage its unique assets to solidly position itself on the frontlines of health care. With its multiple touch points, innovative flagship patient care programs and army of more than 22,000 retail pharmacists and 1,800 nurse practitioners and physician assistants, CVS Caremark is innovating and 
reinventing pharmacy.

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