Addressing shareholders for the first time as chief executive officer, Larry Merlo touted the growth potential of CVS Caremark Corp.'s integrated pharmacy business model at its Annual Meeting of Stockholders.


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Merlo: CVS Caremark's model can't be matched

May 11th, 2011
Larry Merlo

WOONSOCKET, R.I. – Addressing shareholders for the first time as chief executive officer, Larry Merlo touted the growth potential of CVS Caremark Corp.'s integrated pharmacy business model at its Annual Meeting of Stockholders.

Merlo said during the event Wednesday at CVS Caremark's Woonsocket, R.I., headquarters that the company brings a unique offering to the table — retail drug stores and a pharmacy benefit management operation — that will pay off in more effective, affordable and accessible health care for consumers and employers plus a higher value for shareholders down the road.

"The fact is, no one else can match our combination of assets — a leading PBM, one of the largest retail pharmacy chains, a leading specialty pharmacy, a growing Medicare Part D business, and the largest and fastest-growing network of retail health clinics," Merlo told shareholders. "CVS Caremark is using these combined assets to develop and implement innovative programs and offerings, such as Pharmacy Advisor and Maintenance Choice, which should drive long-term value for shareholders."

He noted that CVS Caremark's plan going forward includes a streamlining effort to slash $1 billion in costs from the PBM operation while fueling the robust performance of its retail pharmacy segment and expanding services at its MinuteClinic retail health clinics over the next few years.

"We have a solid base that is expected to lead to steady growth in operating income and significant free cash flow over the next several years," Merlo stated. "We have a great management team and a breadth of capabilities that is unmatched in our industry. We strongly believe that our strategy fits in extremely well with the goals of health reform and the priorities of payers, which bodes well for a bright future."

Last week, during a conference call with financial analysts on CVS Caremark's first-quarter results, Merlo laid out the case for the retail/PBM model. His comments came in response to a recent swell of media and investor scrutiny of the company's integrated business model — notably suggestions that it would be more valuable to shareholders if broken up. He also addressed press reports about allegations that the model is anticompetitive.

"Despite conjecture in the marketplace, there are no plans to split up the company," Merlo told analysts in the call. "We strongly believe that we have the right assets in place to ensure our long-term success in this changing health care environment. Our world-class retail business that makes up about two-thirds of our company's operating profit is expected to achieve continued healthy growth for years to come. We are shifting the role of our 20,000 retail pharmacists from primarily dispensing prescriptions to also providing services, and our integrative pharmacy services model enables us to enhance access to care while lowering overall health care costs and improving health outcomes.

"Over the past few years, we have introduced breakthrough products that capitalize on the benefits of our integrated model, which continue to gain traction in the marketplace," he added, referring to the Maintenance Choice and Pharmacy Advisor programs and the Patient Care Initiative. "These unique products and services cannot be easily replicated through a partnership or an alliance."

And while acknowledging that the PBM's growth has been "disappointing," Merlo explained to analysts that its performance isn't due to the integrated model and that a solid strategy is in place. The five-point plan, he said, centers on driving new clients wins and customer retention, new and expanded clinical offerings, growth in 90-day mail choice and generic dispensing, a focus on high-growth areas such as Medicare Part D and specialty pharmacy, and cost-efficiency efforts.

"I am confident that 2012 will be the year that our PBM breaks trend and demonstrates healthy operating profit growth," Merlo said. "We believe that improving the performance of our PBM is the most effective and fastest way to increase shareholder value and that breaking up the company would be a step in the wrong direction for plan members, retail customers and, certainly, our payers."

Merlo called accusations of anticompetitive behavior by CVS Caremark — especially claims that it's nudging PBM members to CVS stores for prescriptions — "unfounded" and said the company remains "highly confident in the integrity of our business practices."

"The reality is that we have a business model that is challenging the status quo, and some competitors are threatened by our innovative solutions," he commented to analysts.

At the stockholders event Wednesday, CVS Caremark also officially marked the company's leadership transition. Board member and former lead director Terrence Murray honored the work done by former chairman and CEO Tom Ryan, whose retirement went into effect with the close of the annual meeting.

And after the meeting, the board was set to elect David Dorman as the new nonexecutive chairman. A former chairman and CEO of AT&T, Dorman has been a CVS Caremark board member since 2006.

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