CVS Caremark Corp. expects disappointing results for its pharmacy benefits management business next year, based on the loss of a net of $4.8 billion in contracts.

CVS Caremark, pharmacy benefits management, PBM, Tom Ryan, Howard McLure, Len Greer, Federal Trade Commission, inquiry, pharmacies, Geoff Walden

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CVS Caremark looks for PBM results to improve

November 6th, 2009
Tom Ryan

WOONSOCKET, R.I. – CVS Caremark Corp. expects disappointing results for its pharmacy benefits management business next year, based on the loss of a net of $4.8 billion in contracts.

The 2010 operating profit of the Caremark PBM business will drop as much as 10% to 12%, chairman and chief executive officer Tom Ryan said in a conference call with financial analysts on Thursday.

The news, which came as CVS Caremark posted robust increases in third-quarter sales and earnings, sparked a 20% drop in the company's stock price. Shares closed at $28.87 on Thursday after finishing at $36.15 the day before.

Ryan also announced that Caremark president Howard McLure would retire, effective November 27. Ryan said he would take the reins of Caremark until a successor was found.

"I am not Pollyanna here," Ryan said during the conference call. "We get it. We have to produce better results on the PBM side."

At the same time, the company’s retail performance has been "fairly consistent … even in this climate," he said, adding that Caremark "is helping the retail business," which is "taking share from other players."

Deutsche Bank Securities analyst Bill Dreher wrote in a research note that although the PBM contract losses were "a clear disappointment" to CVS Caremark, the company's retail business "continues to perform very well and is gaining share." Management expects the retail unit's operating profit to grow by 13% to 16% next year, which "would be a solid result," he noted.

"Given the retail segment's greater size relative to the PBM segment, low-teens growth in the retail segment should more than offset a low-teens decline in the PBM segment," Dreher said.

CVS Caremark continues to have confidence in the retail/PBM combination, Ryan said, because of the savings it is producing for health plans and their members. Contracts were lost because of price and service, not the business model, he noted.

Caremark’s showing is about "execution and performance," he said. "It's not the products. Believe me, the products that we are offering are accepted in the marketplace. Now we have to tweak the marketing message a little."

Helping change Caremark’s messaging will be newly hired PBM senior vice president of marketing Len Greer. "It's fairly common knowledge that our message early on was not clear," Ryan said. "Len has deep PBM experience. He has disease management experience on the marketing side. So, yes, he has been brought in to help change that message."

CVS Caremark also reported that the Federal Trade Commission is investigating some of its business practices.

Details of the inquiry were not disclosed, but CVS Caremark said it had not violated any antitrust laws. Independent pharmacies and a labor coalition have accused the company of unfairly channeling PBM business to CVS stores.