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PBMs, clinical care capture bigger role in industry’s future

BY Jim Frederick

How serious are major retail pharmacy chains about expanding opportunities in pharmacy benefit management and other health care initiatives? Consider this: the pharmacy benefit management companies owned by two retail pharmacy chains, Walgreen Co. and Rite Aid, scored highest among PBMs in a recent Boehringer Ingelheim Pharmaceuticals, Inc. 2007 Customer Satisfaction Digest, based on the Wilson Rx survey.

Survey respondents named Walgreens Health Initiatives the nation’s highest-ranking pharmacy benefit manager in overall member satisfaction among the 18 major PBMs evaluated in the 2007 WilsonRx PBM Member Satisfaction Survey. And for the second consecutive year, Rite Aid Health Solutions was rated No. 1 based upon Wilson’s PBM satisfaction index.

Clearly, companies like CVS, Walgreens and Rite Aid now see themselves in broader terms as health care specialists.

With its purchase in March of Care-mark, CVS vaulted itself into the top ranks of pharmacy managed care, with $37 billion in annual PBM revenues. Rather than simply referring to its business as drug store retailing, CVS Caremark now calls itself “the nation’s premier integrated pharmacy services provider, combining one of the nation’s leading pharmaceutical services companies with the country’s largest pharmacy chain.”

Caremark operates a national retail pharmacy network with more than 60,000 participating pharmacies, as well as 11 mail service pharmacies. It also operates more than 70 specialty pharmacies, which have been accredited by the Joint Commission on Accreditation of Healthcare Organizations. Its disease management programs have also been accredited by the National Committee for Quality Assurance, according to the company.

“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,” the company reports. “We will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice. And together we will deliver unique products and services that are responsive to the needs of employers, health plans and consumers, and do it in more convenient and flexible ways that allows consumers to take more control of their health care needs.”

Walgreens, for its part, offers a menu of health services through its managed care division, Walgreens Health Services, including:

The Walgreens Health Initiatives pharmacy benefit management operation;

Walgreens Mail Service, which can fill more than 26 million prescriptions a year;

Walgreens Specialty Pharmacy, the fast-growing provider of individualized care for patients with complex conditions like HIV/AIDS, hepatitis C, infertility, multiple sclerosis and transplant rejection;

Walgreens Home Care, which provides home infusion and respiratory services as well as durable medical equipment and related supplies.

In a visit with Walgreens’ top executives earlier this year, retail analyst Meredith Adler reported, “Management stressed that it would continue to expand the health care services it offers through WHI, which include pharmacy benefit management, specialty, and home health services. It has no interest in acquiring a large PBM, but does believe it is valuable to be in the PBM business. Its focus remains the small-employer end of the market.”

Greg Wasson, who ran Walgreens’ managed-care subsidiary before being named company president earlier this year, described Walgreens Health Services as “a complementary business to our…stores.

“For example…our pharmacy benefits manager [Walgreens Health Initiatives] introduced Advantage90, a 90-day retail prescription service that offers plan members the option of going to their neighborhood drug store to fill 90-day prescriptions for chronic diseases.”

That move, he added, “has proved popular with our PBM clients and their members, especially because we have shown cost savings through this service.”

Walgreens’ growing foray into in-store walk-in clinics is part and parcel of its broadened health care focus. According to NACDS economist Laura Miller, the move by drug retailers into in-store clinics “opens the door for a broader array of health care services.”

Don Huonker, Walgreens’ senior vice president of pharmacy services, noted, “That’s been our logic with Walgreens Health Services.

“Our goal is to serve the whole life cycle of a patient,” said Huonker. “We have mail service, home care, specialty pharmacy and services for assisted living facilities. We’re moving toward a total health care package.”

Along those lines, Walgreens Health Services is acquiring “best of breed” specialty pharmacy businesses and merging them with its Walgreens Specialty Pharmacy division. Recent acquisitions include two more centers that offer specialized drug therapy: Bradley’s Center Pharmacy and OneFannin Pharmacy, both located in Houston, moving the company firmly into the field of fertility therapy, including the dispensing of reproductive medications, hormone replacement therapy and prescription compounding.

Other recent additions to WHS and its specialty operations include Farmington, Conn.-based Familymeds Group, a 53-store pharmacy and medical specialty product provider; and Pittsburgh-based Medmark Specialty Pharmacy Solutions, a national provider of injectables, infusibles and advanced oral medications to patients with unique or chronic medication needs for conditions such as hepatitis, multiple sclerosis, HIV, infertility, hemophilia, organ transplants and cancer.

“As the company weighs the pros and cons of the CVS-Caremark merger, management believes that Walgreens’ clear focus on being a health care provider will crystallize its position in the minds of payors,” opined Citibank investment analyst Deborah Weinswig in a recent report.

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Grocer sings new tune in community involvement

BY DSN STAFF

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.”

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CVS wins Caremark battles

BY Antoinette Alexander

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

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