CVS retools management, messaging to pump up PBM biz as Q3 contract losses impact 2010 growth outlook

WOONSOCKET, R.I. Despite posting record third-quarter earnings results, it appears a handful of key losses on the PBM side of its business were all many investors could focus on as CVS Caremark shares dipped sharply in Thursday morning trading. And while that is cause for concern for the company’s leadership, CVS Caremark chief Tom Ryan said he is committed to the PBM model, and has a plan for how the company intends to turn around underperformance in a segment of its business it still believes is a key component of its long-term growth.

While net revenues for the company grew more than 18% during the third quarter, led by sharp gains in its retail segment as well as healthy sales growth in its PBM business, the loss of four big contracts — Chrysler (retirees only), Coventry, Verizon and New Jersey’s state employees — and 15 regional Medicare Part D prescription drug plans since its last earnings call, caused the company to narrow its growth outlook for 2010.

“We had some good wins — we had about 125 new clients,” Ryan told analysts Thursday, recapping the 2009 PBM selling season. And while, in addition to that, the PBM managed to retain roughly 92% worth of existing business, in all, the lost contracts represent about $4.8 billion in net loss for 2010, with approximately $3.7 billion of that coming since the second quarter.

What does that mean for 2010? While the company was not prepared to provide 2010 guidance at the time of its last earnings report, Ryan reminded analysts on the Nov. 5 conference call of his comments during the company’s second-quarter earnings call, at which time he noted that he would have been “disappointed if we didn’t have an EPS growth of at least 13% to 15% next year for the enterprise,” he recalled. However, that projection assumed strong double-digit growth in its retail business, which Ryan said he still expects, and low-to-mid single-digit growth in its PBM business, “which is not going to happen,” he said.

In light of the contract losses — as well as the early renegotiation of the $4 billion federal employees program contract it runs through Blue Cross Blue Shield, which, although it extends the agreement to 2011, will negatively impact gross profit margins for the company next year — Ryan said the company expects operating profit in the PBM side of the business to decline next year, “perhaps as much as 10% to 12%.”

That news appears to have spooked many investors, as the company’s shares tumbled more than 20% in morning trading, hitting a low of $27.95, before beginning to rebound in the afternoon session to almost $29 a share.

But that’s the short-term outlook. More important, Ryan insisted, is that the lost business — which, he underscored, really boils down to four big contracts — is not a reflection of the viability of the company’s integrated pharmacy/ pharmacy services model, or the value of the offering. In particular, its new Maintenance Choice program, which offers beneficiaries the choice of mail or 90-day at retail for the same price, continues to gain traction among payers, he said. In some cases, it may have been about price; in another, it may have been about service; and in the case of the Part D contracts, it may have been a factor of carve-outs that took CVS Caremark out of the bidding. But if there is one thing upon which Ryan is thoroughly convinced, and that he wants to make sure Wall Street doesn’t lose sight of in all of this, is that it definitely is not the model.

“We now have 417 clients representing over 5 million lives that have adopted maintenance choice, or will adopt it in the first quarter 2010,” he explained. “That’s up from 270 clients in the second quarter and 200 at the beginning of the year.” Moreover, this group accounts for “only about 13% of our book,” leaving plenty of room for CVS Caremark to grow.

Despite the negatives, Ryan noted that the third quarter was still a very strong period for the company — even on the PBM side of the business. “We had $1.4 billion in wins in 2010,” he said, and “approximately, $600 million of those gross wins came since our last quarterly call.”

Overall, sales in its pharmacy services segment increased more than 23% during the quarter, reaching a total of $13 billion. In addition, pharmacy network revenues were up 28%. Mail Choice revenues, which includes mail order plus all 90-day claims filled at retail via Maintenance Choice, were up almost 15%. And generic utilization climbed 380 basis points, “to a best in class, 68.3% versus last year,” Ryan said.

However, while it may have been a reasonably good quarter, “we are not in this for quarterly results — we are about growing the company for the long term,” he vowed, announcing a number of new initiatives and recent developments aimed at “returning the PBM to its appropriate level of growth.”

Clearly, the company believes the key to that lies in a change of leadership for the PBM business and, more importantly, a change in the message it delivers to the payer marketplace -- not to mention how it delivers that message.

Perhaps most notably, Ryan noted that Howard McClure, president of Caremark, would be retiring from the company effective Nov. 27. Ryan, who credited McClure, the 30-year Caremark vet, as a key architect of the company’s  integrated model, will serve as interim president of the PBM segment while the company searches for a long-term replacement.

The news came just one day after the announcement that Len Greer would be joining CVS Caremark as SVP marketing for the PBM, replacing Jack Bruner, who is transitioning to the role of EVP strategic development. With 20 years experience in marketing, strategy and product development — most recently with ActiveHealth, where Greer was EVP marketing, responsible for developing and implementing marketing strategies to drive brand awareness in the health plan and plan sponsor marketplace, and six years at Medco Health before that — Greer was tapped specifically, “to help deliver our messages effectively in the marketplace," Ryan said in a Nov. 4th statement.

“Our message early on was not clear,” Ryan told analysts on the third-quarter earnings call. “It was not simple for benefit managers to understand,” he added, noting the pitch focused perhaps too much on retail and not enough on the total integrated offering and the savings it can deliver payers.

Another new message it will have for payers revolves around the newest innovation to emerge out of the PBM group, something it calls its "Consumer Engagement Engine," which Ryan described as “a data management system with a clinical rules engine, which will combine and analyze data to provide us with a single view of every CVS Caremark patient. Whether a patient uses mail pharmacies, our MinuteClinics, our retail pharmacies, our specialty pharmacies, the CEE will further enhance the benefits of our integrated model by distilling data down to actionable messaging for our clients and our pharmacists.”

No matter how patients interact with CVS Caremark, it will be able to deliver targeted messages to those patents. One example Ryan shared involved a CVS pharmacist being able to restart a patient on therapy from a mail-order prescription they may have discontinued, he said, or help a member at retail get started on mail order. “This will provide us with an unprecedented ability to engage patients and eliminate gaps in care, improve adherence and help drive cost savings,” Ryan said. The new CEE tool will be rolled out to its core channels in mid-2010, he said, and expects to have data from the program to help drive its 2011 selling season.

In all, Ryan expects the changes to restore the PBM’s long-term growth projections.

On the retail side of its business, Ryan remained bullish, noting the company’s projected growth of 13% to 16% in 2010. For the quarter, retail revenues were up almost 18%, with same-store sales up 5.7%.For more on CVS’ third-quarter results,

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