CVS Caremark Corporation (NYSE:CVS)
Special Presentation Call
May 21, 2013 8:45 am ET
David Denton – Executive Vice President, Chief Financial Officer
Meredith Adler – Barclays Capital
Meredith Adler – Barclays Capital
My name is Meredith Adler. I’m the analyst that follows food, drug and dollar store companies in the U.S., and I’ve followed CVS for a long time, since 1997. I’m very pleased to introduce Dave Denton, who is the CFO. Dave’s been the CFO since 2010 and he’s been with the company 14 years.
I did want to start with—I don’t usually do this, but just a little bit of a comment because I got some feedback after a dinner we had last night. I think everybody needs to keep in mind there is tremendous change coming – we talked about it a little bit at the lunch – tremendous change coming in the healthcare system, and my opinion is that CVS is positioning itself well. Obviously they are here to talk about how they are positioned, but you’re not going to get absolute clarity. Nobody here—David isn’t going to be able to say, this is what’s going to happen, because nobody really knows. And so I think you will hear more uncertainty in the way they talk than would be normal because of all the change that’s coming, and I’m not sure everybody really fully understands how much is happening and how uncertain it still is.
So with that, I will turn it over to Dave.
Thank you Meredith. Good afternoon everybody. Let’s see if we can get the slide presentation going here. Okay, there we go.
Thank you Meredith, and I really appreciate you joining us today to learn a little bit more about CVS Caremark. Before I begin, our attorneys have asked that I post the Safe Harbor statement, so I’ll give you just a second to familiarize yourself with that, which I’m sure you probably are.
With that, for those of you that might be a little less familiar with CVS Caremark, we are the largest integrated pharmacy company in the United States with offerings across the entire spectrum of pharmacy care. We brought together a suite of assets that drive pharmacy innovation in delivering pharmacy services in a way that is unmatched in the marketplace today. We are a leading player in several growth markets, including retail pharmacy, prescription benefit management, specialty pharmacy, Medicare Part D, and retail health clinics.
Today I’d like to focus in three key areas. The first is our unique position in the marketplace as the only fully integrated pharmacy company. With our breadth of capabilities, scale and agility, we are uniquely positioned to identify and address the emerging opportunities in this rapidly changing healthcare environment. Second, I’ll touch upon our strategic growth framework which aligns our priorities with the emerging healthcare opportunities while leveraging our distinct business model. We are focused on continued strong growth in our core business while we also began to shift to an increasing focus on growing the total enterprise. And third, I’ll discuss our continued commitment to enhancing shareholder value through productive long-term growth, substantial cash flow generation, and disciplined capital allocation priorities.
So let me start with a brief overview of our core businesses. Our retail pharmacy business is an industry leader with a strong track record of consistent execution. In 2012, operating profit in our retail business increased by more than 15%. We now operate over 7,500 retail locations in 41 states, the District of Columbia, Puerto Rico, and now Brazil. We are number one or number two in 22 of the top 25 U.S. drugstore markets with a 21% share of the prescription drug market in the U.S., and we serve nearly 5 million customers each and every day in one of our drugstores.
In 2012, our retail business capitalized on the significant opportunity created by the nine-month impasse between Express Scripts and Walgreen’s whereby Express Scripts members could no longer fill their prescriptions at a Walgreen’s drugstore. The retail team did an excellent job of attracting new Express members into CVS and we gained over 24 million prescriptions, well ahead of our initial expectations. Following the resolution of this impasse last September, our goal was to retain at least 60% of the scripts that we gained. Retention thus far has exceeded our expectations and we remain very confident that we’ll retain at least 60% throughout the year.
With the ongoing transformation of the pharmacy industry and the increasing demands on providers, it is becoming increasingly evident that not all drugstores are created equal. In our breadth of assets, we will continue to find new and better ways to differentiate our model. Our patient care initiative is a great example of the differentiated pharmacy programs that we have in place. Our patient care programs address the issue of non-adherence to medications, which is costing the U.S. healthcare systems nearly $300 billion annually in avoidable healthcare costs. We have a number of programs to address the issues that often make adherence a challenge for our customers, and those programs are such as First Fill Counseling, Adherence Outreach, Refill Reminders, and our Ready Refill program. Since the inception of these programs in 2008, we’ve conducted over 230 million such interventions and the results of these interventions is that we keeping our patients healthier. CVS Caremark has best-in-class adherence rates compared to top retailers, delivering benefits for both our patients, our payors, and as well as CVS Caremark.
Another important driver of our success in engaging consumers and patients has been our Extra Care loyalty program. With more than 70 million active cardholders and more than 15 years of history, we are well ahead of the competition. Extra Care gives us insights to providing personalized offerings to more and meaningful customers and more effectively at driving sales. Today, more than 68% of our front store transactions use the card and account for more than 84% of our total front store sales. Extra Care provides the primary framework for which personalization efforts and related initiatives we can drive home, including our store clustering program as well as our enterprise digital offerings.
Expanding our footprint continues to maintain an important driver of our growth. We consistently add between 2 and 3% retail square footage annually, which has allowed us to keep pace with the demand of prescription utilization. With demographics pointing to the continued growth in demand, plenty of room remains for the kind of measured expansion we’ve been doing for quite some time. We’ve entered 14 new markets since 2009 and we expect to extend our reach by filling in our top markets and by expanding into select new markets.
We’ve also recently announced our first foray into the international marketplace, completing the acquisition of Onofre, a privately-held retail drugstore chain in Sao Paulo, Brazil with 44 stores. While this transaction is not financially material, it is the first step of our international growth strategy that will play out in the years to come. We plan to approach the international marketplace in a measured way in exercising financial discipline.
Another important part of our retail business and key enabler of our integrated pharmacy care offering is our Minute Clinic business. Minute Clinic is the largest and fastest-growing retail clinic business in the United States with nearly 650 clinics in 25 states. Our walk-in clinics offer convenient, cost-effective care without an appointment seven days a week, and Minute Clinic has provided care for more than 15 million patients with more than 8 million visits in just the last three years alone. We’ve cared for patients with both acute and chronic medical conditions, and we have been adding new services including sports physicals, chronic disease management, immunizations, and wellness programs.
We’ve also been expanding our affiliations with major healthcare systems and now have a total of 25 affiliations in place. These relationships are based on health system physicians serving as Minute Clinic medical directors. This creates an opportunity for a variety of collaborative programs, including the integration of electronic information systems and the development of joint clinical programs. With 30 million Americans expected to gain some form of healthcare coverage over the next few years, we are expanding Minute Clinic in order to help meet this growing demand. We plan to add 150 new clinics in 2013 and we expect to have more than 1,500 clinics in 35 states by the year 2017.
Moving on to our pharmacy benefit management business, 2012 proved to be a year of breakout performance while operating profit grew by more than 20%. We are a longstanding leader in the PBM industry with a 26% market share, serving more than 63 million members. We operate our own state-of-the-art mail order pharmacy and maintain a network of about 68,000 retail pharmacies. Our deep clinical expertise allows us to create innovative plan designs for clients and deliver an array of best-in-class services. We’ve also established leadership positions in the fast-growing market segments, which includes Medicare, Medicaid, and specialty pharmacy.
Due to a number of initiatives and new business wins during the past few years, we’ve grown our PBM book of business by more than 60% since 2010. We operate in every part of the PBM marketplace and have built programs to support virtually every type of customer. Our integrated business model is resonating in the marketplace. PBM clients are looking for progressive solutions across a broad suite of programs. Our unmatched solutions leverage our multi-channel, multi-delivery system, enabling them to be relevant to each of our clients depending on their needs as well as their priorities. For example, our innovative maintenance choice program has been extremely successful in the marketplace.
Maintenance choice offers both plan sponsors and their members lower 90-day pricing while providing the convenience to their members of prescription pick-up at a CVS retail location if they so choose. No other PBM in the marketplace offers this type of a program. Given these benefits, maintenance choice have proven to drive deeper adherence among those who participate in the program than those that don’t, and as a client continues to look to ways to manage and control costs, maintenance choice continues to be an attractive option, generating savings of up to 4% of the prescription spend.
In 2013, our maintenance choice 2.0 program became broadly available with clients with either a voluntary or a mandatory plan design. We currently have more than 60 million lives enrolled in maintenance choice, up from nearly 11 million lives in 2012, and we see a significant runway for future adoption of maintenance choice and believe the potential adoption among our current client base represents up to 34 million members. With the early success we’ve seen with the 2.0 program, we expect overall adoption will accelerate in the years to come.
An important part of our PBM growth strategy is building on our leadership positions in both Medicare and Medicaid. With 10,000 baby boomers becoming Medicare-eligible each day, the drug spend in this space is expected to grow by 8.5% annually. We are currently the number 3 player in Medicare Part D market with 6.9 million lives serviced through our own prescription drug plan, as well as through our over 40 health plan clients who sponsor PDP and MAPD plans. With healthcare reform underway, approximately 11 million people are expected to gain healthcare coverage through Medicaid over the next few years, and in the managed Medicaid market we are the leading provider with an estimated 31% market share.
Now moving on to specialty pharmacy, this is another area where we see tremendous growth. The current pipeline of new prescription drugs is dominated by specialty medications with total specialty sales expected to double between 2010 and 2016. You can see on this chart how CVS Caremark’s revenues are expected to almost double between 2010 and 2013 as we anticipate crossing the $20 billion threshold sometime this year. Our client’s costs are significant and growing, and they are looking across the entire spectrum of specialty care for ways to curb this growing cost. Historically, PBMs have managed the portion of specialty spend covered by the prescription benefit; however, about half of all specialty spend flows through the medical benefit, so to address this evolving need of our clients, we are expanding our capabilities to now manage specialty across both the pharmacy as well as the medical benefit. Through investments in new capabilities such as this, we plan to capture more than our fair share of the rapidly growing specialty marketplace.
So as you can see, we are very well positioned for continued strong growth within our core businesses. At the same time, we are very focused on positioning the company to thrive in a rapidly changing healthcare environment. Healthcare in the U.S. is going through a period of intense change due to the implementation of the Affordable Care Act as well as the underlying shift of demographics, advances in technology, and changes in consumer behavior. Given the confluence of all these events, the healthcare industry in fact is expected to change more in the next 10 years than it has changed in the past 50 years.
So what does this change look like? First, we see more than 30 million newly insured Americans as a result of the Affordable Care Act, and as this coverage expansion occurs we also see the growing importance of health plans as well as government payors, given their roles for the newly covered insureds. Physicians will be increasingly incented to improve outcomes in quality and cost which will help them solve the cost-quality challenge facing the U.S. healthcare system. While chronic disease prevalence will likely continue to rise, we believe the healthcare system will be forced to focus on more low cost, high quality solutions, and those that are effective, including improving medication adherence, will prevail.
In pharmacy, the brand to generic shift will continue but at at declining rate as the rate of new generics coming to market begins to moderate post-2015. The greatest growth in pharmacy will be continued innovation in branded and biologic specialty drugs. Finally, the transition to a digital society will accelerate and new technology-driven methods for informing and engaging patients will fundamentally reshape both individual behaviors and the healthcare delivery system.
Given all these changes that are underway in the healthcare system, it is very critically important that we are able to pivot to address these changes and to serve the evolving needs of both our clients as well as our customers. In bringing together the integrated model six years ago, we had three key goals in mind: first, to provide greater access and convenience; to improve health outcomes, and to lower overall costs. We continue to believe that these goals align very well with the direction in which healthcare is headed and that we’ll play an important role in solving the cost-quality access balance. Leveraging our integrated assets to deliver innovative solutions to our customers and our clients will be an important driver to our overall long-term growth.
When you look at our enterprise-wide assets, there are four key areas that differentiate our offerings and enhance our value proposition. First is our substantial purchasing scale. We buy pharmaceuticals for both our leading PBM and our more than 7,500 drugstores. Across our distribution channel, we are the largest provider of prescriptions in the U.S. with more than 1 billion prescriptions filled each and every year.
Second is our deep clinical expertise, which is built on the diverse insights from across our enterprise. We have a deep understanding of consumer behaviors through our retail business, actionable insights through research collaborations with top tier medical organizations, and predictive analytic capabilities that drive best-in-class interventions across all of our channels of delivery.
Third is our strong end-to-end relationships across the client and consumer spectrums. Our unmatched ability to coordinate planned designs and influence consumer behaviors will serve us well as consumer-driven healthcare gains steam and payors look for greater efficiency and effectiveness.
And fourth is our channel-agnostic approach to prescription delivery. By combining our mail and retail capabilities, we’ll enhance patient access and choice while reducing overall cost. This channel-agnostic approach allows us to gain share of prescription of volume regardless of changes in payor mix, payor strategies, and/or patient preferences.
Since we merged in 2007, CVS Caremark has been focused on developing innovative products and successfully growing the overall enterprise, sometimes at the expense of one specific segment. As we grow larger and our offerings expand and gain more adoption, the impact of the individual segments, both positive as well as negative, may become more pronounced, and this will make the sole focus on a particular segment’s performance somewhat blurred when compared to many of our peers. As a pharmacy innovation company, we are focused on growing our share of pharmacy dispensing volumes and as such, growth in covered lives remains a very important factor; and with increased share comes the ability to increase savings for our clients as well as their members. Our focus isn’t just limited to one channel, mail or retail, as it is for some of our competitors. Our channel and business segment-agnostic offerings enhance the performance of the overall enterprise.
This is well demonstrated by the success of our maintenance choice program. CVS Pharmacy’s share of the Caremark book of business has grown dramatically over the past five years from 18% in 2007 to over 30% today. This significantly outpaced the growth in CVS Pharmacy’s overall retail market share and provides solid evidence of the value of the enterprise of our very unique business model. To take this one step further, when clients choose to implement our integrated programs, we often see the consolidation of their scripts into CVS Caremark’s book of business, meaning either the retail or mail channel; and in fact, 18% of our current PBM clients fill over 80% of their prescription volumes flow through one of our channels, either Caremark mail or CVS Pharmacy, and for another 22% of our clients we have between 60 and 80% enterprise share.
Our ability to deliver greater access, higher quality and lower cost to clients will drive share to the CVS Caremark enterprise, and this demonstrates the success of our integrated model in delivering both win-win solutions to both our clients and our payors. As this slide suggests, we see significant opportunity to continue to grow our enterprise share of our PBM client spend.
So in light of our distinct business model and the rapidly changing environment, we’ve done a significant amount of work over the past two years to more clearly define our long-term strategic growth framework, and we’ve landed on a three-pronged strategy to capitalize on the market opportunities we foresee with our unique suite of assets. First is we’ll create greater healthcare value by increasing the convenience and quality of care, expanding and differentiating our services for better health and at lower cost. Second we will serve new and existing clients and customers in new ways. Our teams from across the enterprise are focused on identifying and targeting opportunities to better serve the fastest growing customer segments. Third, we will optimize our enterprise assets by delivering innovative solutions that leverage our unmatched breadth of capabilities.
At our analyst day last December, we discussed six of the highest priority initiatives that we’ve identified through the lens of this strategic growth framework, and we’ve made substantial progress in building the infrastructure to support these and other projects that will support our long-term growth and continue to build upon our unique business model. Certainly we’ll have much more to say about these in the coming years.
Before I wrap up, I’d like to briefly discuss our roadmap for enhancing shareholder value. We’ve been focused on this roadmap for the past several years and it includes three major pillars. The first is our focus on driving productive long-term growth; second is our expectation to generate significant levels of free cash flow; and finally, our disciplined approach to capital allocation. Together, these lead to enhanced shareholder value.
A few weeks ago, we held our first quarter earnings call during which we updated our outlook for 2013. Given our strong results for the first quarter and the fact that we’re still very early in the year, we’ve narrowed our guidance range for the year by raising the low end of the range by $0.03. We expect to deliver adjusted earnings per share from continuing operations in the range of $3.89 to $4.00 a share, reflecting healthy year-over-year growth of 13 to 16.5%, and we expect again to generate free cash flow in the range of 4.8 to $5.1 billion.
We’ve produced adjusted earnings per share from the first quarter of $0.83, $0.03 above the high end of our guidance and up 28% year-over-year, providing a very solid start to 2013. As expected, the influx of new generic drugs, while lightening revenue growth, drove higher profit growth across the enterprise. Both the retail and PBM segments delivered operating profit growth well above the expectations for the quarter with consolidated operating profit up 21% year-over-year.
Again, we continue to generate significant free cash flow and our focus is to deploy this cash to the highest possible return for our shareholders. Late last year, we announced a 38% increase in our quarterly dividend for 2013. In fact, in the past three years we’ve raised our dividend a total of 160%. This puts us on track to meet our 2015 dividend payout ratio target of 25 to 30% this year, two years ahead of our goal that we established back in 2010. Beyond funding the dividend, we expect to complete another 4 billion of share repurchases during the year. Between dividends and share repurchases, we’ll allocate approximately $5 billion towards enhancing total returns for our shareholders this year alone.
Our disciplined capital allocation practices are a vital component to driving shareholder value. We’ll continue to take advantage of the powerful cash generation capabilities of our company with a focus on returning value to our shareholders through both dividends as well as share repurchases.
So in summary, we believe we are very well positioned for continued growth. Our unique integrated model positions us to identify and capitalize on emerging opportunities from across the healthcare spectrum. While our core businesses are positioned for continued growth on a standalone basis, we are migrating to a more integrated view of our company with a greater focus on growing the overall enterprise. Lastly, we remain focused on enhancing shareholder value through healthy earnings growth, strong cash generation, and disciplined capital allocation.
With that, I’ll ask Meredith to come back if she’d like and ask some questions.
Question and Answer Session
Meredith Adler – Barclays Capital
Do you want me to start with questions?
Sure, whatever; or if someone in the audience has questions, I’d be happy to address them directly.
Hi. Could you give us some idea how large your purchasing benefits are, and are you passing any of that on to your customers?
Sure. I can’t give you specifics around that because some of that is competitive, but clearly we have a very large scale advantage compared to all of our peers within the United States. Our job—
Oh, I don’t know – how big is that? But clearly our job is to drive costs down for the payors and clients that we serve and offer value for the members, so clearly we share some of that with our clients to drive value for them but also drive value for us. I think one thing is important – as you saw on the chart earlier, we’ve been very effective at growing our share of dispensing volume within the CVS Caremark channel, and as we grow that volume into our channel, we have the opportunity to generate savings for those clients, add value for CVS Caremark, and add value for that member.
Your Walgreen’s retention – that 60% seems like quite a high number. What makes you so confident in that?
Sure. We actually track that number specifically because we were fortunate to know as those numbers migrated or those patients migrated out of Walgreen’s into CVS, we had to transfer in so we know where they came from, so we can track them specifically period-over-period to understand where we stand. As I said, we expect to maintain at least 60% and we’re ahead of that expectation at the moment.
Secondly as you look at the trend of that, the trend as you might expect when the impasse was originally resolved, we bled some share; but if you look back over the past several months, our share retention has been essentially flat, so we think this event is largely over at this point in time.
Well, I think—yeah, good question. I think when this event first started, we did not look at this as simply a customer acquisition strategy, but both an acquisition strategy and a retention strategy, because we felt strongly at some point in time this event was going to end. So when this event occurred, we staffed up in our stores to make sure that we were appropriately staffed to handle the influx of new prescriptions. We ensured that the pharmacists connected with these new patients to make sure that they gave them a face-to-face name with CVS Pharmacy. We signed them up for all of our adherence programs, like the Ready Fill program as an example, and we put in our stores what we called CVS ambassadors to engage and get those people signed up for our loyalty card program so they could begin to shop the store more fully. Now quite frankly, this has gone on for such a period of time that now CVS Pharmacy is their new pharmacy home compared to what it might have been at Walgreen’s.
Way back in the back?
Could you share a little bit about how you’re thinking about some of these clinics, could they grow and expand across (inaudible) benefits, whether there are return calculations you utilized to assess their success?
Sure. So the question is really how we think about our retail Minute Clinics. We currently have about 650 of them today. We’re adding about 150 on an annual basis. The clinics as they stand today, even as we add 150 new clinics, are break-even at the enterprise level, so that includes the share that we gain from prescriptions that we dispense coming out of those clinics. We look at it as a critical element to I would say both engaging consumers but also tying in with some of the new customers that we see in the healthcare market place. Minute Clinic has been instrumental in calling upon and creating relationships with accountable care organizations, with creating relationships with integrated care systems around the country, and all of those relationships are important as we think about when they write a prescription, where does that prescription go to, which outlet, because people do have choice. So to the degree that we can align our incentives with those physicians and those providers, that’s great for us.
Secondly, what we’re doing is we’re going back to our PBM client base and offering Minute Clinic to those clients at a zero co-pay for their members, so what that means is their members can essentially use Minute Clinic for free, and when they do that the client pays roughly 65 or $75 visit versus $110, $120 visit at a primary care, versus 300, 400, $500 visit at an emergency room. And while Minute Clinic, just because of its sheer size, will never be very large compared to our two largest segments, it has a halo effect across our enterprise.
I would tell you today, if we were here with a benefit manager from a client and we were pitching a piece of business, typically about anywhere from 25 to 50% of the conversation typically centers around Minute Clinic and how Minute Clinic can help their employee population. So we think it’s critical from that standpoint.
Meredith Adler – Barclays Capital
All right, I’ll ask a question. One of the consequences of the dispute between Express Scripts and Walgreen’s was limited networks, and limited networks also have been big in Medicaid and are growing in importance in Medicare. So two parts to the question: first, Walgreen’s did a lot of deals, they have a lot of preferred relationships in Medicare. How do you respond to that, and then where do think—does this grow on the commercial side as well?
Yeah, great question Meredith. As you said, neural networks as far as managed Medicaid has been critically important. We actually go to managed Medicaid as those payors as an enterprise, as both a PBM who provides clinical services and networks and claims processing, but also as a retail pharmacy with CVS as the core limited network and as a Minute Clinic to provide effective low-cost care for those Medicaid patients. Because of that, we capture an extraordinary amount of share into our channel.
I would say that neural networks on the commercial side have not really taken hold much. We’ve seen a few clients who—we have a lot of people who talk about it. It has not practically been implemented a ton but a little bit. I think there’s probably more to come on that story. I would say in the Medicare Part D space, you can’t have a restricted network – you can a preferred network, and Walgreen’s and us, we’ve all been out creating preferred relationships with payors. I think we’ve always been very focused on making sure that those preferred relationships make economic sense for both the payor and for us, so we choose to participate in some and we choose to pass on others, and it becomes an economic decision for us at that point in time.
Meredith Adler – Barclays Capital
All right. I guess another question would be maybe to talk about your adherence efforts and how is pharmacy advisor working, what’s the response from payors.
That’s great. You know, what we have is if you look today, we talk a lot about medication adherence, and if you started today with three patients who had a chronic disease and you put them on a chronic pharmacy regimen, at the end of about six months only one in three of those patients are actually adherent to the medication therapy appropriately. So in the U.S., this is a huge issue, this is a huge issue. I want to step back and look historically.
Historically—you know, five years ago, we talked about adherence and we talked a lot about if we could get people to be more adherent to their high cost branded pharmacy, it would improve healthcare in the long term. The ROI on that was pretty good. But now what we’re doing is we’re trying to get people to adherent to low cost generic medication, given the wave of generic utilization and access that have come into the marketplace recently, so the return on investment has actually accelerated dramatically from an adherence perspective.
Pharmacy advisor is a tool that we have that sits on top of our enterprise. Think about it as a massive clinical rules engine. That clinical rules engine pushes communication to the right staff in the right location within our enterprise to engage the consumer in the right method, so the pharmacist filling the prescription doesn’t have to think about anything. He or she actually gets a notification around this patient was adherent or not adherent, and gives him or her the talk track, more or less, to how to get that patient adherent.
I would say our clients are extremely excited about this, and we actually have a little economic model that can demonstrate if they improve adherence X, Y or Z levels, how much that save them, not on a multi-year basis but on a 12, 18, 24-month basis. So it’s certainly resonating in the marketplace and we are the only provider in the space that can touch people from a mail perspective, a call center perspective, a specialty perspective, and a retail setting perspective.
Meredith Adler – Barclays Capital
Well, I’ll ask you a question about specialty, clearly the fastest growing part of pharmacy. Maybe just talk a little bit first about where does retain fit into it, do you think that that changes over time, and then also what are CVS’ competitive advantages in specialty?
Yeah specialty, as you saw in the slides, is a rapidly growing segment in our business. We’ll top $20 billion in annual revenue this year. Caremark was a leader in specialty and it was really founded on the clinical expertise that was embedded within the Caremark business, and those clinical programs have really enabled us to grow specialty over time. I’d say the one new innovation that’s unique to CVS Caremark is a program that we called integrated specialty, and think about as taking all the clinical programs and all the technologies that we use to support the specialty business from a mail order perspective and pushing those capabilities into the retail setting. So the pharmacist and the technicians are enabled to engage those specialty patients in clinically effective ways and being able to sign them up to therapies in a very rapid manner.
Don’t think about this as the retail locations becoming the center for product dispensing for specialty, but think about them becoming the hub for the information delivery and engagement of those specialty patients. We think this is a really unique model. We have it up and running in a couple markets and we’ve seen significant uptake. The patients are extremely excited about it because today—these patients are very sick, and they need support and engagement, and today they get that through a call center. If we can move the model and get that engagement at a retail location so they can engage the pharmacist directly, and the pharmacy is enabled by a bunch of back-end processes to make him or her very effective from that standpoint, we’ve found it to be very powerful.
This program will roll out broadly first half of next year, and we’re excited about the opportunity.
Meredith Adler – Barclays Capital
Maybe talk about reimbursement rates. Obviously there’s been pressure on a per-script basis, but do you have any sense of what happens as the Affordable Care Act is implemented?
Well, good question. I think inherent in the drugstore business and in the prescription benefit business is reimbursement pressure, and that has been constant for decades, quite frankly. I think as the Affordable Care Act takes hold, a few things are going to occur. One is you’re going to get more people who are going to have coverage. With coverage comes utilization. Those people are going to come into the market place in one of several manners. They could come in via the exchange market. Most likely in the short term, they will come in through the expansion of the Medicaid program. I think when that occurs, what you’re going to see is given the focus and the enterprise expertise we have in managed Medicaid, I think that we will be very nicely positioned to garner more than our fair share of that volume over the next few years.
I think the expectation for the exchange market is still somewhat unclear. I think if look back 24 months ago, people had big expectations for the exchange market taking off very rapidly in 2014. I think if you look at the federal government, they’ve kind of moderated that expectation a little bit recently. I think that the marketplace, as you opened up with Meredith, the marketplace is changing. There’s still some uncertainty around exactly how that’s going to play out.
I will tell you, though, that between our retail business, our clinic business, our PBM business and our specialty business, we have a suite of assets that depending on how these patients show up and where they show up, we will be adequately staffed and positioned to garner, we think, more than our fair share in that marketplace.
Meredith Adler – Barclays Capital
And since I’m a retail analyst as well as a healthcare analyst, maybe ask you some questions about the front end of the business. First, it seems like comps have been modest. Talk a little bit about the consumer, what you think is going on, and then personalization in the Extra Care cards.
Yeah. I think if you look over time, Meredith, I think you’re right – comps in our space have been modest but they have been stable. I mean, we have historically over the last really three or four years, despite a pretty tough economic climate, been at kind of the 1 or 2% front store comp level pretty consistently. And I think partly that’s because of the demographics of the type of products, our assortment in the drugstore business, but I think also importantly to that is our Extra Care card program. We have been very focused on using the card to both drive traffic into our stores within our existing client base or customer base, and also improving the size of the basket of our top customers.
I think what’s important there, Meredith, a little bit is if you look at our top quartile of customers, and those customers are our best customers at CVS Pharmacy, and you look at the market share that we have of their share of wallet in the drugstore category, we probably have 25 or 30% of their share of wallet. So we have even in our top quartile customers an incredible amount of running room to increase that basket size and to increase their purchasing across categories.
So to solve for that, we we’re doing is we’re levering our Extra Care data. We’re trying to create more personal interactions with that customer, and we’re doing that through mostly our digital efforts. If you’re in the States, we have an iPhone app that allows you to—we can communicate with you. You can get your loyalty rewards on your phone, you can use that to drive value. We’re also very close to producing a personalized digital circular, so that circular will be tailored specifically to you and your family and your shopping patterns, so we can drive what’s important to you and support trial across different categories in the front of our business. So we’re really excited about the opportunities going forward in that.
Meredith Adler – Barclays Capital
I think we’re out of time. If anybody has any final questions? Otherwise thank you all very much for coming.
Thank you very much. Thank you for coming. Thank you for your interest in CVS Caremark.
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