Can two different businesses share a company without driving each other crazy?Or as I asked in my Ten Strategic Questions for 2009: “Will CVS Caremark finally prove the strategic value of a Pharmacy Benefit Manager/Retail Pharmacy combo?”
So far, the answer appears to be “not yet.”
I won’t do a deep dive into the company's finances or strategy on the blog (sorry, clients only), but CVS Caremark posted impressive financials in its 2008:Q4 earnings last Thursday. Same store sales at CVS retail pharmacies increased 4.5% in 2008 (4.8% in pharmacy and 3.6% in the front-end). The Longs deal gave an extra boost to fourth quarter revenue. Last week's top-line results shouldn’t be a surprise if you read last Tuesday’s post Pharmacy Avoids Retail Sales Plunge. See:
- CVS Net Rises (Wall Street Journal)
- CVS Caremark Reports Record Results in Fourth Quarter and Year 2008 (official press release)
However, CVS Caremark’s PBM businesses are not becoming a larger share of prescriptions filled at CVS retail pharmacies. Put another way, the flagship 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.
Looking forward, I suspect that CVS Caremark will try to take a stronger hand to generate greater “synergies” for its combination business model. CEO Tom Ryan alluded to "people experimenting with limited networks" on Thursday's earnings call. Wal-Mart has already thrown down the gauntlet for the preferred pharmacy network in its deal with Caterpillar. (See WMT + CAT: Pharmacy's Future?.) However, we still have little evidence that consumers or payers will accept limited networks on a wide-scale.
The Numbers
Here are the numbers behind my observations about PBM revenue synergies at retail pharmacies
Since 2005, CVS has reported an income statement item in its SEC filings called “Intersegment eliminations,” which is currently defined as follows:
“Intersegment eliminations relate to intersegment revenues and accounts receivables that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the revenue on a standalone basis.”
Thus, these eliminations are a proxy for measuring the revenues to CVS retail pharmacy when it fills a script for beneficiaries of a CVS-owned PBM plan. As I understand the accounting, a PBM usually recognizes revenues for these prescriptions because the PBM considers itself to be a principal in the transaction. The relevant PBMs are Pharmacare, Caremark (starting in 2007), and now RxAmerica (starting with Q4:2008).
The chart below shows quarterly intersegment eliminations as a percent of retail pharmacy prescription revenue during the last three years. Thus, the chart shows an estimate how much of CVS' retail prescription revenues come from CVS Caremark’s 3 PBM businesses.
As expected, the numbers jump sharply after the Caremark acquisition. But it’s notable that the share has not consistently increased since the acquisition. If the in-store share starts to rise, then it will be (partial) evidence that maintenance choice is getting traction. (One small twist: RxAmerica contracts will be moving from "net" to "gross" in Q2:2009, which will boost intersegment eliminations.)In the meantime, I suspect some readers will view this disconnect in a positive light because it means that beneficiaries still have the freedom to choose their pharmacy regardless of co-ownership with a PBM.
So, which one is the neat freak and which one is the slob?
