NEW YORK — During Tuesday morning’s Morgan Stanley Healthcare Conference in New York City, CVS Caremark president and CEO Larry Merlo expressed optimism for a strong second half of the year and confidence in retaining a large portion of the prescription volumes gained from the Walgreens-Express Scripts impasse.
“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 said. “When this impasse started, while we put together an acquisition strategy, we also believe that retention strategy was equally important to have in place.”
Walgreens will re-enter the broadest Express Scripts network on Sept. 15.
In light of the impasse, CVS Caremark estimated 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.
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.
“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 said.
Merlo also noted that the company will continue to use its loyalty program to communicate with the new customers — a comment that sparked some questions by analysts on the impact by Walgreens’ new Balance Rewards loyalty program, which officially launches on Sept. 16.
CVS Caremark’s ExtraCare program was established 15 years ago and today has 70 million active cardholders.
“We have always viewed our loyalty program as a retention strategy. It is not a customer acquisition strategy,” said Merlo, who stressed that 83% of those customers gained through the Walgreens-Express Scripts impasse are now enrolled in ExtraCare. "That certainly gives us the ability to communicate and engage them in a very, very personalized fashion and we will take advantage of that opportunity,” Merlo said.
Narrower networks also were a topic of discussion during Tuesday morning’s discussion.
“Clearly, the ESI-Walgreens event created a lot of momentum around narrower networks and, as an example, 20% of the new business we will be bringing on board in 2013 are going to opt for a narrow network,” said Jonathan Roberts, EVP and president of CVS Caremark Pharmacy Services. “We see many flavors of narrow network, from simply taking retailers out, which is one flavor, to creating incentives to go to specific retailers in the form of lower co-pays. So, I think it is another way for clients to save money. I think it was demonstrated that it is very minimal customer disruption to move to a narrow network, so as pressures continue to show themselves with our clients, they will be looking for ways to save money and I think it is a good option for them,” Roberts said.