Inside This Issue - Opinion
Merlo has CVS headed in right direction
May 21st, 2012
A little over a year has passed since Larry Merlo succeeded Tom Ryan as chief executive officer of CVS Caremark. During that time it has become clear that the company is in the hands of a steward who understands its unique combination of assets — a drug chain and a pharmacy benefits management business that are both leaders in their field — and is intent on deploying them for the good of patients, payers and shareholders.
The 2007 merger that brought CVS and Caremark together was motivated by the idea that extending the continuum of pharmacy care would help improve access, enhance patient outcomes and lower overall health care costs. In the years that followed the company sometimes struggled to realize that vision.
As CEO, Merlo made the creation of meaningful synergies between the two parts of the business a top priority, and on his watch CVS Caremark has begun to develop new ways to leverage the divisions’ complementary strengths.
The latest evidence of Merlo’s success is provided by the company’s first quarter financial results: Revenue jumped 19.9% to $30.8 billion, and profits from continuing operations rose 9.4% to $777 million. Much has been made — including by CVS Caremark itself — of the lift the company’s retail operations received as a result of the standoff between Walgreen Co., CVS/pharmacy’s archrival, and Express Scripts Inc., the only PBM larger than Caremark.
Merlo told financial analysts that CVS/pharmacy’s impressive 9.8% same-store sales gain at the prescription counter included a 350- to 400-basis-point benefit from the Walgreens-ESI impasse.
That situation shouldn’t be allowed to obscure the drug chain’s underlying strength at the prescription counter and in the rest of the store. At the front end, where Merlo said the battle between CVS Caremark’s peers had little impact, comparable-store volume was up an impressive 5.3%. The division’s operating income advanced 18.4%.
The results at CVS/pharmacy demonstrate the effectiveness of the management team Merlo, who was president of the division under Ryan, has assembled. The latest quarterly performance shows that the retailer hasn’t missed a beat with Mark Cosby, the former Macy’s executive who succeeded Merlo, and Judy Strauss Sansone, who became CVS/pharmacy’s top merchant when Mike Bloom left to become president of Family Dollar Stores, in those key management posts.
Some good news extended to the PBM side of the business, where revenue soared 32.3%, largely as a result of the purchase of Universal American Corp.’s Medicare prescription drug plan during the second quarter of 2011 and a number of new clients. Margin pressure remained a challenge, however, pushing the division’s operating earnings down 10.7% to $349 million.
Merlo is confident that the recent progress at Caremark will continue. “While it is still early in the 2013 PBM selling season, we’re optimistic about the opportunities and continue to feel very good about our position in the marketplace,” he said.
The merger of ESI and Medco Health Solutions, the nation’s first- and third-largest PBMs, and the ESI-Walgreens dispute, have put the entire PBM sector in flux, creating conditions where CVS Caremark will have a good chance to win new contracts. And, if the Supreme Court upholds the Affordable Care Act, more than 30 million additional people will obtain health care coverage, increasing the need for quality pharmacy care and efficient management of prescription drug coverage.
CVS Caremark is arguably in the best position of any retail pharmacy operator to capitalize on those developments, and in Merlo and the team he has assembled, it has leadership attuned to what needs to be done.