CVS/Caremark merger: a new era for pharmacy?
The game of pharmacy has changed.
The drug store industry’s two most powerful players, Walgreen Co. and CVS, each made dramatic moves this year that signal a bold new retail strategy: to exert a powerful influence within the managed care industry that has been the bane of retail pharmacy for two decades.
Both CVS and Walgreens are pursuing a new kind of pharmacy marketing, by buying up or building a major stake in the PBM industry that to a large extent controls pharmacy reimbursements and determines where patients can get their prescriptions filled.
In the process, both chains—and CVS in particular—are rewriting the rules that have governed pharmacy retailing since the 1990s.
CVS has struck hardest. In March, the 6,200-store chain completed its multi-billion-dollar buyout of Caremark, the nation’s third-largest PBM and one of its largest mail-order pharmacy operations. The merger of Caremark with PharmaCare, CVS’ existing PBM operation, created a new, retail-owned PBM powerhouse. In a larger sense, the combination of CVS and Care-mark—and the integration of Caremark’s massive member rolls and patient outcomes and drug utilization data with CVS’ own economies of scale and powerful market reach—are likely to shift the balance of power in both retail pharmacy and pharmacy managed care.
CVS chairman, president and chief executive officer Tom Ryan called the merger “a game-changer.
“It is changing the way the industry offers pharmacy and pharmaceutical services,” Ryan told analysts in the run-up to the buyout. “For years, we had one industry just looking at the payer and one industry just looking at the consumer. No one has ever taken a holistic view end-to-end, and that’s what this combination is going to do.”
Walgreens, for its part, is pursuing a similar strategy from the ground up. The nation’s top-selling and most-profitable drug chain has made growing its pharmacy managed care subsidiary, Walgreens Health Initiatives, a top strategic priority. It is using WHI as a platform for the development and rollout of new pharmacy service offerings. Its nearly 6,000 stores can provide services to patients enrolled in any pharmacy benefit plan, like its Advantage90 long-term maintenance prescription program.
One telling sign of the high importance Walgreens places on WHI as a key component of its overall pharmacy strategy was the promotion in April of WHI’s president, Greg Wasson, to president and chief operating officer. The elevation of Wasson puts him firmly in line as the next top manager of Walgreens and brings to the executive suite his perspective as head of a major PBM operation, with annual sales now well in excess of $2 billion.
Wasson has spent the last six years running the company’s burgeoning pharmacy benefit management and mail-order division, overseeing its rise to become one of the largest of the second-tier PBM and mail order operations.
The pursuit of an integrated strategy that combines the patient-centered capabilities of thousands of pharmacies with the market-moving clout of a chain-owned PBM makes sense on another level, as well. CVS’ takeover of Caremark thrust it into the upper ranks of the pharmacy benefit management industry, changing the dynamic of an often-troubled relationship between community pharmacy and PBMs by giving one of chain pharmacy’s own control of the PBM industry’s biggest player.
That, in turn, could soften that relationship. Caremark, at least, could prove to be a more pharmacy-friendly entity under its new owner. “In general, if there’s more retail pharmacy influence on prescription management, and it’s enhancing the role of community pharmacy in health care, those could be positives for community pharmacy,” noted a spokesman for one major CVS competitor.
A major survey of pharmacy consumer shopping preferences early this year by Wilson Health Information pointed to the potential power CVS and Walgreens could exert by combining the marketing power, leverage and data-gathering capabilities of their massive pharmacy networks with their fast-growing PBM operations.
The poll was conducted prior to CVS’ purchase of Caremark. As reported in the Boehringer Ingelheim Pharmaceuticals 2007 Pharmacy Satisfaction Digest, based on the Wilson Rx survey, Walgreens ranks highest in overall shopping preference, with 12.5 percent of the more than 33,500 that responded to the Wilson poll naming Walgreens as their top choice for prescriptions and other pharmacy services. CVS ranked second, with 10.2 percent of customer households naming the chain the most commonly used pharmacy.
Wal-Mart rated No. 3, ranking highest in preference with 6.8 percent of consumers. Next up in preference—and here’s where the numbers get interesting—were the mail-order pharmacy operations of Medco, with 4.7 percent, and Caremark, at 3.7 percent.
“We think [the merger of CVS and Caremark] will obviously take share and grow our business both in mail, retail and the front end of our stores,” Ryan said.
In particular, CVS’ top executive foresees “significant benefits for payers through more effective cost management and innovative new programs.” Consumers, he added, would gain “expanded choice, unparalleled access and more personalized services…all with the goal of lowering costs and improving health outcomes.”
Wall Street appeared to endorse the strategy. Senior research analyst Eric Bosshard called CVS/Caremark “a more valuable franchise” that “better controls its destiny.”
What this new industry dynamic means for smaller and less-capitalized rivals—including independent pharmacies with far less leverage vis-à-vis PBMs and health plan payers—remains to be seen. The National Community Pharmacists Association reacted to CVS’ purchase of Caremark cautiously on behalf of its independent pharmacy members, and called on CVS to make its PBM’s negotiations more transparent, “so that employers, health plans, regulators and consumers can see how their dollars are being spent.” It also asked for an end to take-it-or-leave-it contracts, an end to shrinking drug formularies and mandatory mail programs, and a level playing field that would allow patients to fill 90-day prescriptions at retail.
It goes without saying that the integration of patient databases at CVS/Caremark and Walgreens/WHI will have to conform to the patient privacy protections mandated by the Health Insurance Portability and Accountability Act. HIPAA considerations aside, merging each chain’s prescription data with the patient drug utilization and outcomes data captured by that chain’s PBM division creates a whole slew of possibilities. Wielding that powerful database—particularly at a time when the nation’s health care system is being pushed to adopt a comprehensive, integrated health information technology platform that connects all the pieces of the health care puzzle—could yield big advantages in areas like medication therapy management, disease and outcomes management, and patient compliance.
“Once electronic records become prevalent, a pharmacist can play a more serious role as a caregiver,” asserted Laura Miller, a senior economist for the National Association of Chain Drug Stores. “The retail pharmacy that takes advantage of this opportunity will be ahead of the health care curve.”
Thus, it’s no accident that Walgreens, like CVS, is pursuing an integrated approach to pharmacy marketing, pharmacist-delivered patient care services and pharmacy benefit management. “Pharmacists,” said Walgreens chairman and chief executive officer Jeff Rein, “are the core of who we are. Our future is about emphasizing the personal and clinical aspects of pharmacy, as well as broadening drug store services.
“As medication experts, pharmacists are in a unique position to be involved with patient outcomes,” Rein added. Community pharmacy is evolving from a dispenser of product to a more sophisticated model.
Trent Taylor, executive vice president and chief information officer at Walgreens, elaborated in a recent, company-sponsored roundtable on the future of pharmacy. “We used to re-engineer pharmacy procedures to lower costs and improve efficiencies. Now we can connect networks, capture data, integrate information and automate more tasks to give pharmacists more time for patients,” he said.
This year, Walgreens’ pharmacy leaders are making a major push to boost patients’ compliance with their drug therapy. Former chairman David Bernauer called the “growing role of government and private industry to push patient compliance” a positive trend “that bodes well for patient health, control of health care costs and pharmacies like Walgreens.”
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants