CVS' Merlo outlines factors for future growth

WOONSOCKET, R.I. — CVS Caremark’s annual meeting of stockholders held Wednesday morning was an emotional and momentous occasion for the company as it marked the official retirement of Tom Ryan, former chairman and CEO, and the beginning of a new chapter as Larry Merlo takes the reigns as CEO.

As previously reported, Merlo assumed the role as CEO on March 1, becoming CVS’ fourth CEO in the company’s history. Ryan had remained nonexecutive chairman until his retirement at the company’s annual meeting of shareholders held Wednesday at the company’s headquarters in Woonsocket.

“I was fortunate to be with a company I’ve loved,” an emotional Ryan told shareholders, noting that it was CVS’ culture and people that drew him to the company. “I’m passing it to a great leader, one whom I respect and who knows this business. [Merlo] will take this company to great heights.” Speaking at the annual meeting of shareholders for the first time as CVS Caremark CEO, Merlo discussed 2010 highlights and provided a business update, including key elements of its plan to improve pharmacy benefit management performance.

Merlo outlined many of the factors that will play into the future growth of the pharmacy industry — continued generic expansion, the aging population, healthcare reform, accelerated growth in specialty pharmacy and improvements in patient care — and expressed that CVS Caremark, with its integrated approach to pharmacy care, is ideally positioned to help patients live healthier lives and reduce healthcare costs.

Improvements in patient care and closing the gap in medication nonadherence has been and continues to be a significant focus for CVS Caremark as sub-optimal pharmacy care costs the United States nearly $300 billion annually.

“Nonadherence is a preventable source of costs, and CVS Caremark is taking leadership in being part of the solution,” Merlo said. Merlo, who has stressed the company’s commitment to its PBM business, also provided shareholders with an overview of the key elements of its plan to improve PBM performance.

Those elements are:

Achieve continued momentum in new business wins and strong client retention;

Continue to develop and up-sell its unique clinical offerings;

Drive growth in 90-day mail choice and generic dispensing rate;

Focus on high-growth areas, especially Medicare Part D, specialty pharmacy and Aetna; and

Execute successfully on the PBM streamlining initiative.

“2012 will be the year we break trend and achieve operating profit growth,” Merlo said of the PBM business.

Fueling long-term growth will be the company’s 12-year agreement with Aetna to provide PBM services to roughly 9.7 million Aetna PBM members and administer about $9.5 billion in annual drug spend. This deal is believed to be the largest and longest new-term contract ever to have been negotiated in the PBM industry.

In addition, Pharmacy Advisor, which launched in January, has quickly become the company’s flagship clinical program. The program is designed to manage costs, improve medication adherence and close gaps in care for members with diabetes.

The program, which currently has 10 million active patients with another 2.5 million committed for 2011 implementation, continues to grow. In 2012, CVS Caremark will launch a Pharmacy Advisor program for four key cardiovascular conditions.

Furthermore, CVS Caremark’s recent acquisition of the Medicare Part D business of Universal American not only will more than double the size of CVS Caremark’s Medicare Part D program, but the move also comes just as the first baby boomers turn 65 years old.

But of course that doesn’t mean that its retail business has become less important. With more than 7,200 stores serving 5 million customers each day, CVS Caremark’s retail business continues to achieve healthy growth, Merlo told attendees.

Merlo reiterated that its ExtraCare loyalty program has more than 67 million active members and, with more than 10 years of experience, enables the company to drive profitable front-store sales.

Store brands continue to be an area of focus, and there are currently more than 5,000 items storewide that account for more than 17% of front-end sales.

Among the factors that will drive growth going forward are expanding the store-brand business and making further improvements in the Longs stores and its clustering initiatives.

CVS Caremark has a “world-class retail business that is firing on all cylinders,” Merlo said.

The company’s MinuteClinic business continues to be strong, and patient visits were up 24% on a comparable basis during the first quarter due to higher levels of flu-related illnesses. MinuteClinic, which currently has 560 clinics in 55 markets, remains on track to double its footprint over the next five years.

“We are well-positioned in a growing and vibrant industry,” Merlo told attendees in his closing remarks.

Before the meeting came to a close, CVS Caremark board member and former lead director Terrence Murray recognized the work done by Ryan.

“There are attributes that distinguish great CEOs, and I’ve always felt that Tom possessed them,” Murray said. "As a shareholder, I’m delighted that Tom was our leader for the last 17 years.”