Thursday, May 07, 2009

A Glimmer of Synergy at CVS Caremark

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!


  1. Good job with the update. But I think you overestimate whether clients are going to like this "synergy" if it ends up costing them more. A good PBM focuses on managing the client's drug trend, not on picking one pharmacy over another to help the pharmacy sell more shampoo. I bet that the numbers will start reversing after clients figure out how much synergy costs them in higher drug spending.

  2. I am in agreement with PBM fan…However, there are synergies to be had by combining retail pharmacy with PBM services, but not by using the business model that CVS has chosen. Their synergies can only exist as long as high margins exist on drug sales. The margins are disappearing (disappeared) on brands for PBMs and with the direct to payer model that you have been reporting on the high margins will disappear on generics soon as well, as they should. We are combining PBM services with retail pharmacy, mostly independent pharmacists, to show health outcomes and ROI that is where the financial synergisms will be seen.

  3. AnonymousMay 07, 2009

    In the case of CVS Caremark, the conflicts of interest and potential to game the system
    are particularly pronounced given the vast size of the company and the financial and
    management relationship between its pharmacies and PBM functions. CVS’s acquisition of
    Caremark, which placed the second largest PBM in the hands of the largest pharmacy chain, has
    created a significant likelihood of harm to consumers and a heightened opportunity for
    anticompetitive and deceptive conduct. The opportunities for anticompetitive, fraudulent and
    exclusionary conduct have increased substantially and merit FTC review. Here are two
     First, CVS Caremark has implemented the so-called “Maintenance Choice
    Program.” Through this program CVS and Caremark inform consumers that if they
    want to continue to fill prescriptions at their current copay they must switch their
    prescription to mail order or a CVS store. If they choose to use a non-CVS pharmacy
    they must pay an increased copay. The maintenance choice program harms consumers
    by forcing them to pay a higher price if they choose a competing pharmacy to CVS, even
    if that competitor offers the consumer superior service and convenience.
    CVS’s anticompetitive steering practices may cause the most acute harm in rural and
    inner-city areas, where consumers already face drastically fewer retail-pharmacy options.
    In addition, other pharmacies, especially pharmacies in inner city or rural areas, will have
    their cost increased and may find it difficult to survive. We also believe that on several
    occasions, Caremark has shared confidential patient information with CVS to enable
    CVS pharmacists to call non-CVS customers and direct them to fill their prescriptions at
    CVS stores.
     Second, CVS Caremark has entered into arrangements with pharmaceutical
    manufacturers to promote more expensive and less effective drugs in exchange for May 7, 2009 Letter from Sharon Treat, NLARx Executive Director, to FTC Chairman Liebowitz
    P.O. Box 492 • Hallowell, Maine 04347 • 207-622-5597 • Fax: 207-622-3302 •
    payments from drug companies. For example, in 2008 CVS received money from
    Merck in exchange for sending letters to doctors to promote the use of Januvia, a drug
    used for non-insulin dependent diabetes. Januvia costs up to eight times more than other
    comparable treatments, according to a recent study in the Archives of Internal Medicine.3
    Januvia is also less effective than comparable treatments according to Consumer
    Reports.4 Moreover, some of the doctors targeted say that the letters they received
    recommended the treatment for specific patients – referenced by name and by medical
    chart – who would have been inappropriate candidates for the drug.
    We believe that this evidence suggests that CVS Caremark has engaged in
    anticompetitive conduct that ultimately will harm both consumers and competition. We urge the
    Commission to open an investigation of CVS Caremark to explore whether there have been
    competition or consumer protection violations of the law.
    Feel free to contact me or the Chair of our Board, District of Columbia Councilmember
    David Catania, for more information or to follow up. My contact information is below, and I can
    also be reached at (207)242-8558 or