The famous British economist John Maynard Keynes once quipped: "When the facts change, I change my mind – what do you do, sir?"
Judging by CVS Caremark's latest financials (CVS Caremark Reports Results for First Quarter 2009), I need to change my mind on revenue synergies.
In CVS Caremark: No Visible Revenue Synergy, I wrote:
Maintenance Choice program may be appealing to payers and consumers, but there is not yet a quantitatively visible shift in CVS' retail activity. If CVS pharmacies are taking retail pharmacy market share, then it's not yet as a result of corporate co-ownership with a PBM.However, the metric that I proposed in that article now shows clear evidence of revenue synergy between the retail business and the PBM business.
In February's article, I propose that revenue synergy between the retail business and the PBM businesses could be estimated using the accounting construct called "intersegment eliminations." These eliminations measure the revenues to CVS retail pharmacies when they fill scripts for beneficiaries of a CVS-owned PBM plan. See the original post for details.
The chart below shows my updated computation of the share of CVS' retail prescription revenues that come from CVS Caremark's 3 PBM businesses through 2009:Q1.
As you can see, the numbers jumped significantly in Q1 (to 17.9%) for the first time since the Caremark acquisition. The numbers will move up again next quarter because RxAmerica contracts will move from "net" to "gross" accounting, which will boost intersegment eliminations.
Reported pharmacy revenue growth also supports the synergy story. CVS Caremark claims that 200 clients have signed up for Maintenance Choice, which offers 90-day scripts with mail pricing at retail stores. In the transcript of the earnings call, the company states that the Maintenance Choice program improved the pharmacy same store sales growth rate by approximately 120 basis points, i.e., by 26% (=120 / 460). In other words, more than one quarter of pharmacy same-store sales growth was attributed to the shift of 90-day mail scripts to retail stores.
Pharmacy same store sales rose 4.6% at CVS Caremark's retail pharmacies in the first quarter of 2009, which appears to be above chain peers Walgreens and Rite-Aid. Now you understand why independent pharmacists are trying to turn back the clock on the deal. (See Could the FTC undo CVS Caremark?)
Looking ahead, I still wonder about the net economics for the business of shifting consumers from mail to retail. In other words, is CVS Caremark sacrificing its PBM business to benefit the retail business? But CEO Tom Ryan states unambiguously on the call:
"Maintenance Choice is profitable to our overall enterprise."
"The Maintenance Choice program is definitely more profitable for the enterprise when you look at the entire book of business."
More details will apparently be forthcoming next week at CVS Caremark's 2009 Annual Analyst/Investor Meeting, so stay tuned for further updates. Perhaps we'll also hear how Caremark's clients benefit from these synergies.
P.S. Today is 05/07/09. Happy Odd Day!