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CVS has upbeat outlook for pharmacy

CVS Caremark Corp. forecasts a strong finish to 2012, and its pharmacy business is looking forward to retaining new patients gained from the contract impasse between rivals Walgreen Co. and Express Scripts Inc. (ESI) as well as to generics growth in 2013 and 2014, according to president and chief executive officer Larry Merlo.

When CVS reported second-quarter results in early August, the company estimated that it would hold onto at least 50% of the prescription volume it had added as a result of the contract dispute — now resolved — between Walgreens and pharmacy benefit manager ESI. Walgreens rejoined the PBM's pharmacy network as of Sept. 15.

Merlo, speaking at the Morgan Stanley Healthcare Conference earlier this month, noted that the pharmacy customer is the most difficult to lose and, once lost, the hardest to get back because of the inconvenience of the pharmacy transfer process.

"We believe there are a large number of people who simply don't want to go through that process a second time," he said.

Merlo stressed that CVS had put as much emphasis on its customer retention strategy as on its acquisition approach. As a result, the company has gained valuable knowledge of its new pharmacy customers.

"We know that 70% of those new customers live within two miles of a CVS, 55% of those high-value customers have enrolled in our automatic prescription refill program, and more than 83% have enrolled in ExtraCare," he said. "So that certainly gives us an opportunity to communicate and engage customers in a very personalized fashion."

Merlo said he thinks customers who return to Walgreens will do so within a month or two of Walgreens return to the ESI network, and by around the end of the year CVS' customer retention level should be fairly permanent.

Another positive that CVS Caremark executives cited at the conference is the likelihood of continued profitability gains from generic drugs into 2013 and 2014.

"It is not just new generics entering the market; it is the increased use of generics across the marketplace," said Merlo. "We have 10,000 baby boomers turning 65 every day, and that is expected to continue through the remainder of this decade."

In response to a financial analyst's question about the possibility of intense price competition once Walgreens is back in the ESI network, Merlo explained that CVS has a highly targeted marketing strategy that will employ promotion advertising and leverage its ExtraCare customer loyalty program to communicate with high-value customers.

ExtraCare, he added, has always been a retention vehicle. "We will be very disciplined in terms of how we are using our resources and our spend, which is reflected in the guidance we have provided for the balance of the year," he said. "We do not see a price war erupting."

This week CVS upped the ante for ExtraCare members with a new promotion that enables them to double their quarterly ExtraBucks Rewards on most purchases during the peak fall and winter shopping season. Under the program, ExtraCare members can earn 4% back — instead of 2% — of nearly all dollars spent on everyday purchases at CVS/pharmacy until Dec. 15.

The Double Quarterly ExtraBucks Rewards promotion was unveiled a day after Walgreens officially began its long-awaited loyalty program, Balance Rewards. The drug chain enabled shoppers to enroll online starting Sept. 6 and had more than 1 million signed up as of the day before its Sept. 16 launch.

The rewards program's debut came a day after Walgreens regained its status as a pharmacy provider in the Express Scripts network. Walgreens, too, is targeting Express Scripts members and other potential new pharmacy patients with a promotion offering a $25 Walgreens gift card if they transfer a prescription to the chain. In a research note released Tuesday, William Blair & Co. analyst Mark Miller said his firm estimates that Walgreens will recapture about a third of its lost Express Scripts Rx patients, or about 3 million to 4 million customers.

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