Below, I use an obscure footnote within CVS Health’s recently released 2014 10-K SEC filing to quantify these revenue synergies. As you can see in the chart below, CVS Health’s Caremark pharmacy benefit management (PBM) business accounted for a record 35% of CVS retail pharmacies’ prescription revenues. That’s much higher than Caremark’s overall market share.
The analysis provides another motivation for Rite Aid’s acquisition of EnvisionRx. Rite Aid, however, is a multi-regional chain with prescription revenues that are one-third of CVS retail's revenues. Question to ponder: can it create the same elixir with Envision, which has revenues that are only 6% as big as Caremark's?
THE JOY OF SEC
Before I get to the numbers, I want to rhapsodize about Securities and Exchange Commission (SEC) corporate filings.
As you might expect, I enjoy reading annual 10-K filings. SEC filings are a fascinating source of competitive intelligence. Regulatory and legal requirements force companies to disclose important details about their business. Surprisingly, however, few people bother to read them closely.
My CVS Health data analysis below, based upon an obscure footnote in its filing, demonstrates how much we can learn from a 10-K’s hard-to-decipher language and financial presentations.
The SEC's EDGAR system is a quick and free way to find your favorite public company's filings.
SYNERGY: ORGANIC & RAW
CVS Health’s Maintenance Choice program is the most prominent limited network model for commercial plan sponsors. (See section 8.3.2. in our 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies.) Under the program, a beneficiary can obtain maintenance medications from either a CVS retail pharmacy or a Caremark mail pharmacy. This model permits consumer choice of dispensing channel (mail or retail) but limits the choice to CVS Health outlets.
The payer saves money whenever a consumer fills a 90-day prescription at a CVS retail pharmacy at mail pharmacy pricing—instead of three 30-day scripts at a CVS or non-CVS retail pharmacy at presumably higher retail reimbursement levels.
In 2012, CVS disclosed that payers saved 4% of gross retail spend after adopting Maintenance Choice. Hence, plan sponsors—the pharmacy benefit management clients of CVS Caremark—have been quickly adopting it. For 2015, the company expects to enroll 20 million to 21 million covered lives in the program, up from 2.9 million in 2009. The following chart comes from the CVS Health’s December 2014 analyst day presentation.
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Competing PBMs cannot readily match the Maintenance Choice program. That’s because a separately owned PBM and pharmacy chain would battle over the per-prescription profit.
Maintenance Choice offers a unique revenue synergy between CVS Health’s retail and PBM business segments. It shifts maintenance prescriptions dispensed by Caremark’s mail pharmacy or by other retail pharmacies into CVS retail pharmacies.
This synergy, which I first described way back in May 2009’s A Glimmer of Synergy at CVS Caremark, has grown along with the company’s Caremark PBM business and its Maintenance Choice program.
Disclosures in CVS Health’s 10-K allow us to estimate how much of its retail business comes from the PBM business. CVS Health reports an income statement item called intersegment eliminations, which reflects revenues counted by both the retail pharmacy and the PBM. These eliminations occur because (1) CVS retail pharmacies are network pharmacies for Caremark, and (2) Maintenance Choice allows beneficiaries to use a CVS retail pharmacy instead of Caremark mail pharmacy. In 2014, Maintenance Choice accounted for 29% of these eliminations.
As the next chart shows, CVS retail pharmacies are gaining an increasing share of prescription revenues from claims processed by Caremark’s PBM business. For 2014, we estimate that Caremark accounted for 35% of CVS retail pharmacies’ prescription revenues.
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Meanwhile, Caremark’s overall national share is about 24%. See Exhibit 47 in our new report.
As I see it, the PBM business still provides much greater synergies for the pharmacy business than vice versa. Nevertheless, CVS Health execs must surely be raising a fermented glass of tea, sugar, bacteria and yeast to their winning formula.