Size matters to CVS Caremark (formerly CVS), the nation's second-largest drugstore chain and a leading pharmacy benefits manager. With about 7,200 retail and specialty drugstores under the CVS and Longs Drug banners, it trails archrival Walgreen by about 300 stores. CVS has grown rapidly through a string of acquisitions that included the Eckerd and Longs Drug Stores chains. Also, CVS purchased prescription benefits management (PBM) firm Caremark Rx for about $26.5 billion in 2007. Caremark was combined with CVS's PBM and specialty pharmacy unit PharmaCare Management Services to form Caremark Pharmacy Services, which filled or managed some 585 million prescriptions in 2010.
The merger of the drugstore chain and pharmacy benefit manager was intended to strengthen CVS's value to investors as well as health plan sponsors and consumers. However, management's expectation that the merger would drive growth did not materialize in 2010; CVS Caremark saw its earnings decline about 7% from the prior year on sales that took more than $2 billion hit (from about $98.7 billion in 2009 to just over $96.4 billion). Retail pharmacy sales, which grew by 4%, were not enough to offset a 6% slump in pharmacy services. The company's lack luster results were in part attributable a loss of nearly $5 billion in contracts with employers and health plans during 2010.
Going forward, CVS Caremark's pharmacy services business faces a major headwind created by the pending $29-billion acquisition of Medco Health Solutions by Express Scripts to form Express Scripts Holding Co. By joining forces, the two prescription-drug-benefits management firms mean to reduce costs for customers through greater efficiency. The resulting holding company would be about twice the size of CVS Caremark.
CVS Caremark, meanwhile, has come under pressure from consumer groups and shareholders to undo the merger. Critics say the combination benefits the retail side of the business at the expense of its pharmacy services. Moreover, federal and state regulators are investigating accusations of anticompetitive behavior by CVS Caremark. Consumer groups and some independent pharmacists have accused the pharmacy health care giant of using confidential patient information from Caremark, which manages prescription benefits for health plans, to steer consumers to its pharmacies. (The company denies the practice.)
Tweaking its pharmacy services strategy, CVS Caremark in late 2011 sold its TheraCom consulting business to AmerisourceBergen for $250 million. (TheraCom serves pharmaceutical and biotechnology drug makers by primarily providing reimbursement and patient-access help support.) The move follows CVS Caremark's acquisition of the Medicare prescription drug services unit of Universal American for $1.25 billion. The deal reportedly more than doubles the size of the CVS Medicare Part D program, adding nearly 2 million Medicare Part D members to a current base of 1 million. CVS Caremark also won a contract in early 2011 to administer Aetna's retail pharmacy network. Estimated to garner $8.2 billion in revenue in 2011, CVS Caremark is managing both purchasing and prescription filling for Aetna's mail-order and specialty pharmacy operations.
On the street, after more than doubling the number of drugstores it operates in California and adding Hawaii with its Longs purchase, on top of more than 100 new drugstores in 2010, in 2011 CVS expects to open between 225 and 250 new or relocated stores (but closing about 15 locations), and introduce about 100 new MinuteClinic locations. MinuteClinic (acquired in 2006) operates health clinics inside retail stores. The CVS subsidiary runs about 560 clinics in some 25 states, most of which operate within CVS stores. Continued expansion of its retail network is a key element of the company's growth strategy and essential if CVS is to keep up with ever-expanding Walgreen, which in 2010 acquired the 250-plus Duane Reade drugstore chain based in New York City. (With CVS and Walgreen drugstores carpeting the nation's suburbs, Walgreen is now seeking to conquer urban America.)
In addition to opening new stores, CVS is attempting to increase sales at existing ones. Prescription drugs account for more than two-thirds of its sales, and the retailer is attempting to grow revenues from over-the-counter medications and general merchandise through its private-label offering of more than 4,400 products. (CVS brand and proprietary products account for about 17% of front-of-store revenues.) CVS also doubled the size of grocery sections in about 3,000 stores during 2010, in an effort to capture a wider slice of shoppers' food budgets.
Non-executive chairman and former CEO Thomas Ryan, a 36-year veteran of CVS and top executive for the past 16 years, retired May 2011. Succeeding Ryan as CEO, Larry Merlo, initially president and COO of the company, assumed the job in March 2011. Merlo, known for his expertise in integrating acquisitions and building teams, is a trained pharmacist with 30 years of experience in pharmacy health. CVS Caremark formed a three-man office of the chairman to help smooth the transition, comprising Ryan, Merlo, and president of Caremark Pharmacy Services, Per Lofberg.