CVS Grows While Legal Storm Clouds Gather

CVS Caremark (NYSE:CVS) reported its latest quarterly results on Tuesday, once again reinforcing the retail market share benefits of Maintenance Choice. Keep in mind that some of these retail gains come from cannibalizing its own mail-order pharmacy. Management seems confident about the upcoming Pharmacy Benefit Managers (PBM) selling season, but see my comments below for some important open issues.

The company also formally disclosed the growing breadth of investigations by state and Federal agencies. There’s probably more smoke than fire as I note in Pepsi, CVS Caremark, and the FTC, but who knows what can happen once the subpoenas start flying?

You can get the details yourself if you listen to the earnings call or read the transcript. As always, Pembroke Consulting retainer clients and Gerson Lehrman Group clients can schedule phone calls with me for additional comments beyond what I discuss in this post.

RETAIL GAINS: MAINTENANCE CHOICE + MAIL SHIFT

CVS’ same store pharmacy (prescription) revenues grew by 3.7 % in the first quarter. As you can see in the chart below, CVS’ same store pharmacy sales growth began outpacing Walgreen's (NYSE:WAG) growth beginning in early 2008. Both beat Rite-Aid (NYSE:RAD) handily, but that’s a pretty low hurdle to jump.

Payers continue to adopt Maintenance Choice (MC) into their benefit design. According to CVS, 494 PBM clients (5.6 million lives) have signed up for the program, up from 412 PBM clients (5.1 million lives) at the end of 2009.

MC again powered up CVS’ retail business, helping CVS gain retail market share. The company claims that retail pharmacy market share (excluding Longs) grew by 56 points (+0.56%) versus 2009:Q1 in markets with CVS stores. Don’t forget that some of these retail gains are come from shifting prescriptions out of its own mail-order pharmacy, not just share gains from competing pharmacies.

Here’s the reported impact of Maintenance Choice on CVS Caremark’s retail same-store pharmacy sales over the past five quarters:

• 2009:Q1 +120 basis points
• 2009:Q2 +190 basis points
• 2009:Q3 +250 basis points
• 2009:Q4 +270 basis points
• 2010:Q1 +260 basis points

CVS Caremark’s PBM market share losses had one unusual twist this quarter. The share of CVS retail prescription revenues from claims processed by Caremark’s PBM business was down slightly in 2010:Q1 versus 2009:Q4, the first reversal in this trend since I began tracking this metric. See Maintenance Choice Update: CVS Gain, Caremark Same for my previous comments on this metric. However, the reverse was not true. CVS retail was a much greater proportion of Caremark’s retail network revenues. Hmmm.

PBM UPDATE

CVS Caremark is trumpeting its turnaround message for the PBM business. Some observations:

• The PBM business added about $500 million of new business. The two wins mentioned on the call were the State of Tennessee and the Mass GIC. (I’m not sure which other wins are public information, so I can’t discuss them on Drug Channels.)
  
  
• CVS Caremark is communicating a strong “Retail over Mail” message regarding adherence, creating clear differentiation versus Medco Health Solutions (NYSE:MHS) and Express Scripts (NASDAQ:ESRX). It’s not yet clear how payers will interpret the dueling data sets during the upcoming selling season. I’m also not sure if CVS Caremark has really figured out how to explain the purported benefits of broad retail reach and multi-channel fulfillment.
  
  
• In contrast to the comments from Medco (highlighted in last week's Drug Channels News Roundup), Tom Ryan stated that “pricing in the market is still rational and competitive.”
  
  
• Due to contract losses and the MC-induced shift to retail, PBM mail claims decreased 4.8% in 2010:Q1 versus 2009:Q1. This decline weighed on McKesson’s (NYSE:MCK) revenue growth as reported on Monday.
  
  
• I was surprised not to hear anything about the CustomeRx Savings Initiative, a retail-based program in which pharmacists identify lower-cost products (generic or brand) for patients. No traction? Too soon to tell?
  

LEGAL ISSUES

CVS Caremark’s 10-Q filing provided additional color on previously disclosed investigations. Here’s what the filing said about the highest profile one:

“In August 2009, the Company was notified by the Federal Trade Commission (the “FTC”) that it is conducting a non-public investigation under the Federal Trade Commission Act into certain of the Company’s business practices. In March 2010, the Company learned that various State Attorneys General offices and certain other government agencies are conducting a multi-state investigation of the Company regarding issues similar to those being investigated by the FTC. At this time, there are 24 states, the District of Columbia, and the County of Los Angeles, are known to be participating in this multi-state investigation.”

Independent pharmacists have stirred up the mud, but they may be wrongly pointing the finger at a PBM instead of the payers. Re-read Pepsi, CVS Caremark, and the FTC to understand why these investigations may not lead to any enforcement actions.

Standard disclaimer: I have no idea what evidence or documents these investigations will turn up. I have no business or financial relationship with CVS Caremark. I am not involved in this legal matter and am not privy to any internal documents. I reserve the right to change my opinions as additional information becomes known.