CVS' Merlo: CVS Caremark positioned to 'effectively compete' in PBM industry
WOONSOCKET, R.I. — CVS Caremark posted second-quarter results that were at the high end of its guidance and narrowed its 2011 outlook on continued confidence. But it was the PBM business — and the potential merger of PBM rivals Express Scripts and Medco Health Solutions — that was top of mind for many industry observers, and was a topic that CVS Caremark president and CEO Larry Merlo hit head on at the start of Thursday morning’s conference call.
“Before getting into the business update, I want to give you our perspective on the recent PBM industry news. Many of you have been asking about the implications of two of our largest peers combining into one company. ... Assuming that the proposed transaction is completed, I am more confident than ever that CVS Caremark can and will effectively compete in this vibrant industry,” Merlo told analysts during the quarterly conference call.
Merlo told analysts that CVS Caremark’s “suite of assets uniquely positions us to assist payers in controlling costs, while enhancing member access and improving health outcomes.”
Furthermore, with the evolution of U.S. healthcare to a more consumer-directed care model, the company’s multiple consumer touch points — which include more than 7,200 retail drug stores and nearly 600 MinuteClinic locations — ideally position the company to promote cost-effective and healthy behaviors, Merlo explained.
As widely reported, PBM giants Express Scripts and Medco Health Solutions announced on July 21 plans to merge in a deal worth $29.1 billion. The deal, if approved, would create the country’s largest PBM, followed by CVS Caremark.
However, whether antitrust regulators will approve such a merger has yet to be seen, and retail pharmacy trade groups have since come forward to voice their objections, claiming that such a deal would “exacerbate [PBM's] detrimental effect on pharmacy patient care.”
Despite the outcome of the proposed merger, Merlo’s optimism clearly remains high — and it’s with good reason. “The success that we’re having in both the 2011 and 2012 selling season clearly demonstrates that our model is resonating with payers. So I’m confident that we can continue to gain share, add value for our clients and their members and deliver healthy, long-term returns to our shareholders,” Merlo said.
During the second quarter ended June 30, revenues in the pharmacy services segment rose 23.2% to $14.6 billion. The increase primarily was associated with the addition of the previously announced contract with Aetna, as well as new activity resulting from its acquisition of the Medicare prescription drug business of Universal American Corp.
With a “terrific” 2011 selling season under its belt, the 2012 selling season also has proven successful to date, according to Merlo, with more than 50% of the contracts scheduled for renewal completed, in line with last year at this time, and the retention rate standing at 98%.
The PBM business also has secured some significant wins. As of mid-July, on a 2012-impact basis, the PBM has won $4.8 billion in net new business, including the Federal Employee Program mail-order and specialty pharmacy services contracts.
“As we sit today, we will see net new  revenues in excess of $10 billion. And while many of the large contracts out for bid in 2012 have been decided, there are still opportunities for new business,” Merlo said. “Obviously, we are all very pleased [with] the progress we’ve made in both the  and  selling seasons and our significantly improved client retention rate.”
Merlo also said that the company has made progress on its previously announced 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.
The retail segment experienced growth during the second quarter. Revenues in the retail pharmacy segment rose 3.6% to $14.8 billion. Same-store sales rose 2%, as pharmacy same-store sales rose 2.6%. Front-end same-store sales benefited from the shift in Easter holiday and rose 0.8%.
Net income for the quarter totaled $815 million, or 60 cents per share, compared with $821 million, or 60 cents per share, in the year-ago period. Excluding some items, earnings per share from continuing operations were 65 cents in the current quarter.
“We are relying on our ExtraCare loyalty program to drive profitable sales as opposed [to] what we call ‘empty sales’ — sales without a profit flow through. So while sales were at the lower end of our guidance range, I’m pleased with our performance since we achieved higher front store margins in the quarter and record second-quarter retail operating margins,” Merlo said.
Merlo noted that CVS' retail adherence program, internally known as the Patient Care Initiative, is now in its fourth year and, in the first half of this year alone, pharmacists performed nearly 30 million adherence interventions across the store base with “compelling results.” With first-fill counseling, patients are 15% more likely to get to the second fill; with adherence outreach, patients are 25% more likely to obtain their refill; and with new script pickup reminders, 20% of scripts are picked up that may have otherwise been returned to stock.
CVS Caremark's MinuteClinic business — which in recent weeks surpassed 10 million patient visits since opening its doors in 2000 — experienced a 28% increase in revenues during the second quarter and is on track to break even by the end of this year. There currently are 598 clinics in operation and the company plans to open 100 new MinuteClinic locations annually for the next five years.
“With this continued expansion, MinuteClinic will increase its role as a collaborator in developing integrated health networks and accountable care organizations. Over the past couple of years, we have formed some valuable affiliations with a number of leading health systems,” Merlo said.
Taking into account the solid results reported to date, the company narrowed its earnings per share guidance for the full year 2011. The company now expects adjusted earnings per share from continuing operations to be between $2.75 and $2.81, compared with its previous guidance of $2.72 and $2.82.
“I am very pleased with our second-quarter results, which came in at the high end of our guidance. We reported adjusted earnings per share from continuing operations of 65 cents with the PBM segment in line with our expectations, and the retail segment exceeding our expectations benefiting from solid expense control and higher-than-expected generic utilization positively impacting our gross margin,” Merlo said. “Additionally, we generated more than $800 million in free cash flow quarter and $2.4 billion year-to-date. So we are very confident that we will generate between $4 billion and $4.2 billion for the full year.”