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CVS off to ‘good start,’ Merlo says; company committed to PBM biz

Retail sales, PBM businesses see gains in Q1

WOONSOCKET, R.I. — CVS Caremark is “off to a good start” in 2011 as first-quarter results registered slightly above guidance for both the retail and PBM businesses, and the retail segment continues to gain share. But what president and CEO Larry Merlo wanted to clarify straight away during Thursday morning’s conference was the company’s commitment to its PBM division, and he outlined its plan to further improve PBM performance.

“I want to hit this topic head on to clarify any misperceptions in the marketplace and set our story and our focus straight," Merlo told analysts. "Despite conjecture in the marketplace, there are no plans to split up the company. We strongly believe that we have the right assets in place to ensure our long-term success in this changing healthcare environment."

"Our world-class retail business that makes up about two-thirds of our company’s operating profit is expected to achieve continued healthy growth for years to come," Merlo continued. "We are shifting the role of our 20,000 retail pharmacists from primarily dispensing prescriptions to also providing services, and our integrated pharmacy services model enables us to enhance access to care while lowering overall healthcare costs and improving health outcomes, which fits extremely well with the goals of health reform, along with goals of payers.”

For the first quarter ended March 31, revenues in the pharmacy services segment rose 18.4% to $14 billion, growth that primarily was associated with the addition of the previously announced long-term contract with Aetna.

During the past few years, CVS Caremark has brought to market several innovative products — such as Maintenance Choice and Pharmacy Advisor — which continue to gain traction in the marketplace and, according to Merlo, cannot be easily replicated through a partnership or an alliance. In addition, the company has achieved more than $700 million in annual purchasing synergies and overhead savings from the retail/PBM-integrated model.

Merlo, however, acknowledged that growth in the PBM segment has been “disappointing,” but stressed the company’s unwavering focus on returning to healthy operating profit growth. He also outlined five key elements of its plan to bolster PBM performance:

  • Achieve continued momentum in new business wins and strong client retention;

  • Continue to develop and up-sell its unique clinical offerings;

  • Drive growth in 90-day mail choice and generic dispensing rate;

  • Focus on high-growth areas, especially Medicare Part D, specialty pharmacy and Aetna; and

  • Executive successfully on the PBM streamlining initiative.

For example, Merlo stated that the company's Pharmacy Advisor program — which launched in January to manage costs, improve medication adherence and close gaps in care for members with diabetes — has resulted in nearly 80% of those patients who receive gap-in-care intervention subsequently filling their gap medication.

The program, which currently has 10 million active patients, with another 2.5 million committed for 2011 implementation, continues to grow. In 2012, CVS Caremark will launch a Pharmacy Advisor program for four key cardiovascular conditions and will expand to additional conditions over time.

In addition, the rapidly growing specialty pharmacy sector continues to be an area of focus, as evidenced by the recent announcement of a new medical benefit drug management service that will be available to clients beginning January 2012, which will provide a solution for oncology patients and providers. Data has shown that today, more than 50% of specialty spend flows through the medical benefit and is largely unmanaged, so CVS Caremark is looking to help clients better manage the expensive drugs and improve quality of care for their members.

“I believe we have the right plan being executed by the right people, supported with the right processes and technology to deliver on the full potential of this [PBM] business over the long term,” Merlo said. “In addition to the anticipated benefits of this plan, 2012 begins the generic wave that will carry through the next few years with [more than] $90 billion of branded products coming off patent.”

That’s not to say, however, that the retail business — which posted a 4.4% boost in first-quarter revenues to $14.6 billion — is not a critical focus for CVS Caremark. Same-store sales rose 2.6%, compared with the year-ago period, while front-end same-store sales increased 0.4%. Pharmacy same-store sales rose 3.7%, reflecting a strong flu season, as well as a positive impact from Maintenance Choice.

Merlo indicated that the company's store clustering initiatives will help fuel future growth. The company now is into its second year of the Urban Cluster store concept rollout and plans to complete another 220 stores this year, on top of 200 stores completed last year.

With regard to its Pharmacy Dominant Cluster pilot, the company is focused on remerchandising stores that are shopped primarily for pharmacy and related products. “We’ve seen exciting results from our first wave of test stores that we completed late last year, demonstrating that it is possible to significantly reduce SKU count and inventory while growing sales and margin,” Merlo said. “We are being very careful and deliberate to find the right balance. We’re conducting lots of customer research, so we will test this format longer than others.”

Merlo noted that the test will expand to an additional group of stores in the second half of the year and the company looks to scale the model beginning in 2012.

The company’s MinuteClinic business continues to be strong, and patient visits were up 24% on a comparable basis during the first quarter due to higher levels of flu-related illnesses. The clinic operator has been working to expand its menu of services beyond acute care and, according to Merlo, is working on a wellness model with a focus on chronic disease management.

Total net revenues for the quarter increased $2.1 billion to a record $25.9 billion. Net income totaled $713 million, or 52 cents per share, compared with $771 million, or 55 cents per share, in the year-ago period. “We are pleased with our start to the year and are certainly very focused on ensuring that we execute well on our operating plan and achieve our financial targets,” Merlo said.

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