My $0.02? The stage is now set for CVS to spin off Caremark in 2011 or 2012. Once Ryan retires in 2011, all of the primary architects of the original deal and most of their lieutenants will be gone. Assuming the Caremark business gets stabilized, there’s limited reason to keep the companies together.
Here are some thoughts for your reading pleasure, organized around three questions:
- Where's the strategic synergy for Caremark?
- Is the “Office of the Chairman” positive or negative for the PBM business?
- Will CVS sell the PBM business?
Tom Ryan staked his career on the transformative combination of a major pharmacy chain with a major PBM. Ryan’s earlier-than-expected departure acknowledges the tough reality: the premise behind the deal is still unproven.
There is no question that the combination has been a big win for the retail business. See CVS Grows While Legal Storm Clouds Gather for my most recent analysis.
But CVS Caremark has struggled to prove the value promised when the deal was announced. You know, all that stuff about improving clinical outcomes, controlling healthcare costs, offering disease management, yada yada yada. Take a trip down memory lane with the original November 2006 press release.
Alas, many promises remain unfulfilled and many questions unanswered. How does patient care improve when a PBM owns a brick-and-mortar pharmacy chain? Where can a combined PBM-pharmacy chain improve performance on traditional PBM metrics? How exactly does a payer benefit when CVS increases its pharmacy market share?
Mr. Lofberg acknowledged these challenges on his very first earnings call in February 2010 when he said that a PBM’s clients “don’t really care that much if we are also a retail pharmacy chain in addition to being a PBM.” Translation: the combination only makes sense if there is a clear advantage to the payer.
Is an “Office of the Chairman” positive or negative for the PBM business?
The new Office of the Chairman demonstrates the importance of the Caremark business, which has been sacrificed over the past few years for the benefit of the retail pharmacy business. ANother post on this topic: CVS Caremark: Pharmacy Gain, PBM Pain.
By making the move in the middle of the PBM selling season, the creation of this office sends a signal to the market about the company’s commitment to the PBM business.
On the other hand, I wonder why they felt the need to send such a signal if the selling season was going so well. Hmmm.
Will CVS sell the PBM business?
Tom Ryan drove the acquisition based on his vision that the deal was “a logical evolution for CVS, Caremark and the entire pharmacy industry.” Given my comments above, it’s reasonable to speculate on whether CVS will sell or spin-off the company in 2011 or 2012.
Cost synergies are one potential barrier to a split up. CVS Caremark has successfully leveraged its combined size against generic manufacturers.
It will also be hard to divide the spoils of Maintenance Choice because separate mail and retail pharmacies would always be battling over the profit from an incremental script. BTW, the economics of Maintenance Choice for Caremark have never been explained. See The Odd Economics of Maintenance Choice for details.
Other aspects are simpler. Wholesaler relationships—McKesson/Caremark and Cardinal/CVS—could survive a split without missing a beat. CVS Caremark has yet to leverage the power of its “enterprise” against brand drug manufacturers—although not for lack of trying.
Searching for Synergy: The Pony Story
Ronald Reagan’s favorite joke as told by speechwriter Peter Robinson:
The joke concerns twin boys of five or six. Worried that the boys had developed extreme personalities -- one was a total pessimist, the other a total optimist -- their parents took them to a psychiatrist.A book written about the AOL-Time Warner merger was titled There Must Be a Pony in Here Somewhere. Giddy up!
First the psychiatrist treated the pessimist. Trying to brighten his outlook, the psychiatrist took him to a room piled to the ceiling with brand-new toys. But instead of yelping with delight, the little boy burst into tears. "What's the matter?" the psychiatrist asked, baffled. "Don't you want to play with any of the toys?" "Yes," the little boy bawled, "but if I did I'd only break them."
Next the psychiatrist treated the optimist. Trying to dampen his out look, the psychiatrist took him to a room piled to the ceiling with horse manure. But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees, and began gleefully digging out scoop after scoop with his bare hands.
"What do you think you're doing?" the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist. "With all this manure," the little boy replied, beaming, "there must be a pony in here somewhere!"