CVS' Merlo: PBM continues to demonstrate success

Q3 revenues rise to $26.7B

WOONSOCKET, R.I. — CVS Caremark on Thursday reported solid third-quarter results — 2 cents above the high end of its guidance range — driven in large part by better-than-expected performance in its pharmacy benefit management, which is in the midst of a profit-improvement plan.

“Back in March, upon assuming CEO responsibilities, I told you we were very focused on turning around the growth trajectory of our PBM in order to unlock the full value of our integrated enterprise, and I am very pleased to report that we are delivering on our promises and we remain confident that the PBM will return to healthy operating profit growth next year,” Larry Merlo, president and CEO of CVS Caremark, told analysts during the quarterly conference call.

As previously reported by Drug Store News, Merlo has set in motion a five-point plan for PBM profit improvement, which includes:

  • 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

  • Execute successfully on the PBM streamlining initiative.

In looking at the first step — achieving continued momentum in new business wins and strong client retention – Merlo told analysts on Thursday that, with nearly 70% of the contracts scheduled for renewal in 2012 completed, it is seeing a 98% retention rate. With regard to new business, the company has secured some additional wins on top of the net new business wins totaling $4.8 billion.

With regard to developing and up-selling clinical offerings, Merlo said the company has “made great progress.” For example, its Pharmacy Advisor program for diabetes, which launched in January, will have about 12.5 million active members by year-end and another 1.2 million members committed to the program for next year. Next year, the company will build on the program, adding four key cardiovascular conditions to Pharmacy Advisor.

“We see the opportunity to double, or perhaps triple, the number of members using Pharmacy Advisor as we expand to other conditions, so we very excited with our program and the early results from Pharmacy Advisor are very encouraging,” Merlo told analysts.

Pharmacy Advisor is a solution that leverages the company’s assets both as a PBM and as a national retail pharmacy chain to improve pharmacy care. Pharmacy Advisor provides members with brief, targeted and proactive consultations through PBM and retail channels across the continuum of care. CVS Caremark engages members according to their expressed preferences and when they are most receptive to messages about their prescribed therapy — face-to-face when members choose to fill prescriptions at CVS/pharmacy or by phone when members choose mail pharmacy.

CVS Caremark also is focused, under the five-point plan, on driving growth in 90-day mail choice and generics, and the company has added 51 new plans and another 1.7 million lives to its Maintenance Choice population. The population now totals 757 plans, representing 9.9 million lives.

“Over time, we see significant opportunity to increase the number of lives using Maintenance Choice, and our data continues to demonstrate that Maintenance has been successful in broadening access, while reducing costs, and improving prescription adherence,” Merlo said. “Equally important, now that the early adopters of Maintenance Choice are entering contract renewals we have retained over 99% of all Maintenance Clients, demonstrating that our unique integrated programs increase client loyalty and make our contracts a little stickier.”

Merlo also indicated that the integration of the Medicare Part D business of Universal American, which it acquired earlier this year, is “going well.” The acquisition not only more than doubled the size of CVS Caremark’s Medicare Part D program, but the move came just as the first baby boomers turned 65 years old.

With specialty pharmacy representing another area of “significant opportunity,” Merlo told analysts that specialty revenues grew a strong 26.3% during the third quarter, driven by underlying growth and the addition of the Aetna specialty business.

Furthermore, CVS Caremark continues to capitalize on the long-term potential of its agreement with Aetna. The implementation phase is ongoing, and the systems migration is expected to begin in 2012 and continue through the first half of 2013. As CVS Caremark previously stated, the specialty migration has been completed, and the company is now in the process of migrating Aetna mail prescriptions to CVS Caremark facilities.

Touching upon the fifth point — executing on the PBM streamlining initiative — Merlo told analysts that the company is on track to achieve more than $1 billion in related cost savings through 2015.

“Our five-point plan is being executive successfully, and as a result, I fully expect the PBM to demonstrate healthy operating profit growth in 2012,” Merlo said.

For the quarter ended Sept. 30, revenues in the pharmacy services segment rose 25.8% to $14.8 billion.

The retail business saw an increase of 3.8% in revenues to $14.7 billion in the quarter. Same-store sales rose 2.3%, as front-end same-store sales rose 2%. Pharmacy same-store sales increased 2.4%.

At the front of the store, traffic during the quarter was flat, but the average transaction size grew compared with last year, Merlo said. He also noted that the company is seeing success with its new proprietary beauty brand, Nuance Salma Hayek, with results year to date “exceeding plan.” Nuance Salma Hayek was developed in partnership with actress Salma Hayek.

The retailer continues to see “strong results” from its Clustering initiative. Now in the second year of its rollout, the Urban Cluster store concept currently encompasses 325 stores, with plans to encompass 420 stores by the end of the year.

A key element of the Urban Cluster concept is a significant focus on consumables. The Urban Cluster store concept can include slight variations to appeal to the local area. For instance, at the CVS Urban Cluster store in New York’s Union Square area, a more extensive wine selection appeals to tourists and guests staying at the W Hotel a few blocks away.

The company is currently testing and developing additional Clustering concepts, and Merlo told analysts that the company expects to gain additional insights in the coming months.

Turning to its MinuteClinic business, the company currently operates 645 clinics. Despite virtually no flu season to date, revenues rose 15.5% during the third quarter and remains on track to break even by the end of the year. During the quarter, MinuteClinic entered its 11th clinical affiliation.

Net revenues for the company rose 12.5% to a record $26.7 billion during the quarter.

Net income attributable to CVS Caremark rose to $868 million, or 65 cents per share, from $809 million, or 59 cents per share, a year earlier.

Adjusted earnings per share from continuing operations attributable to CVS Caremark rose to 70 cents from 64 cents.

Given CVS Caremark’s strong performance year-to-date and outlook for the remainder of the year, the company narrowed its 2011 earnings per share guidance range and now expects adjusted earnings per share from continuing operations to be between $2.77 and $2.81 compared with its prior guidance of $2.75 to $2.81. For the year, it expects to generate free cash flow in the range of $4 billion and $4.2 billion.

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