Whether you woke up Monday feeling rejuvenated or slightly nauseated, now that health-care legislation has been signed into law, it's a perfect time to give the country's largest drugstore chain a checkup. So come with me while I take a closer look at many of the issues facing CVS Caremark
Despite the potentially crippling mismanagement of a key division and its failure to rally with many peers at the end of 2009, CVS Caremark is holding key competitor Walgreen
CVS CEO Tom Ryan has made no bones about his own personal drive to transform the U.S. health-care system. (Hey, haven't we all made the same pledge at one time or another?) With the bill now a law, the coming months will be pivotal.
PBM triage
What a difference a new year makes. Less than six months ago, 7,000-store-strong CVS phoned in sick with news that its pharmacy benefits management (PBM) division was headed into 2010 down $4.8 billion because major clients were switching to other providers. It predicted the unit's operating profit could be down as much as 12% for this year. Merging the drugstore chain with PBM was at the center of CVS' acquisition of Caremark, and the loss is not an insignificant chunk of $98.7 billion in sales that the chain brought in for 2009. Bandage, anyone?
Today, investors remain encouraged with Ryan's late-December move to bring in Per Lofberg, an exec with a track record leading a company in which CVS has a partial stake. While it's still early days, analysts liked what they heard from Lofberg and the rest of management when the company reported fourth-quarter results. CVS posted a slightly higher than expected quarterly rise in February, and said 2010 earnings could beat analysts' predictions.
Today, the PBM unit -- which dominates the market along with Medco Health Solutions
CVS is also continuing its aggressive path of acquisitions. The company beat out Walgreen for the purchase of West Coast chain Longs Drug Stores and is upping its stake in Generation Health, the genetics-testing company which Lofberg formerly ran. This aspect of CVS' business will no doubt come to the fore based on requirements of the new legislation.
The acquisitions are significant, as competition for largest-chain bragging rights is heating up. Walgreen is eyeing the prescription file business and other assets of 17 of USA Drug's Ike's and Super D stores. This comes on the heels of Walgreen's $1.08 billion deal to purchase the 250-store Duane Reade chain last month.
Potential pitfalls
CVS' acquisition gusto has raised eyebrows among lawmakers. The 2007 merger with Caremark is now under an FTC probe and is being scrutinized by some customers and pharmacists.
Also, Ryan has a knack for throwing a lot of potentially money-sucking ideas against the wall. Lately he's been pushing Maintenance Choice, a program that offers the discount of a mail-order prescription but allows patients to pick up their meds in the store. But some analysts say the program will destroy CVS' ability to get the discounts based on mail-order business from drug suppliers if patrons pick up their prescriptions in stores.
Then there are CVS' in-house clinics. Although the company temporarily shuttered 90 of its Minute Clinics in early 2009 -- Florida and California were hit hardest -- it opened sites in new locales like Massachusetts. The closures were likely a reaction to recessionary times. I see the scenario as an indication that CVS is sticking with the clinics for the long haul; trying to be strategic with locales.
Naysayers also point out that CVS Caremark has yet to perform as well as its two rivals, but CVS management contends the business will continue to open enormous inroads with clients including General Electric
Do you give CVS a clean bill of health? Let us know in the comments section below.
