CVS Caremark Corp Executive Insights: New Wins Breakdown, PBM

On Wednesday, CVS Caremark Corp (NYSE:CVS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

New Wins Breakdown

Stephanie – Citigroup: This is (Stephanie) filling in for Deb Weinswig. Can you please provide some detail around the breakdown of the $7 billion of new wins this season?

Per Lofberg – EVP, CVS Caremark Corporation and President, Caremark Pharmacy Services: Well, The biggest single one is the FEP contract which was the mail order and the specialty business that we didn’t have. We also renewed the Retail part of that. So the incremental revenue that we got from the FEP contract was roughly $2.5 billion out of the $7 billion and then the rest of it is made up by a number of other prominent employer and other types of customers.

A Closer Look: CVS Earnings Cheat Sheet>>

Stephanie – Citigroup: Also one additional question. Can you provide some more color around your decision to close the 25 Beauty 360 locations and what is your strategy for beauty and cosmetics going forward?

Larry J. Merlo – President and CEO: Yeah. Let me take the first part of that and then I’ll ask Mark to jump in. But as you know, we began this concept about four years ago. It was disruptive in the marketplace in terms of offering what had been only distributed through department stores and specialty beauty stores, certainly products not available in the drug channel and we got tremendous learnings over that three, four-year period. We found that we did not, were not able to secure all of the, call it Tier 1 brands that would create a holistic offering for that prestige beauty customer. But again, it was a very successful innovative test where we got learning’s that we can apply to our beauty business going forward.

David M. Denton – EVP and CFO: So just a little color on top of what Larry said. We clearly believe in the beauty business, it’s a huge priority for us as we go forward. It was a 25 store test where we learned a ton. We are in the process right now of a whole beauty reinvention and much of the learning that we took from those tests will be integrated into that beauty reinvention. Other things that we have in the works that I think that have been effective on the beauty front have been the beauty club that we launched this past year, which now has 12 million members, and we continue to look for ways to take that to the next level. Then the successful launch that we had this past year of the Salma Hayek nuance product, exclusive to us. It came with industry accolades and customer accolades and it is also meeting our sales expectations. So we have a lot happening in the beauty world these days. We are committed to it and stay tuned for more on that front.


Lisa Gill – JPMorgan: I have a couple of question on the PBM side. First of when you talk about the one quarter that’s already been renewed. Can you talk, either Per or Larry, about what your retention rate has been so far. Then secondly can you also talk about what customers are looking for at this year in the selling season. Are you hearing more around narrow networks and obviously you are well positioned to provide a narrow network? What are seeing competitively with all the disruption and most notably recently SXC and Catalyst coming together as well.

Larry J. Merlo – President and CEO: Lisa, let me take the first part, and then I’ll ask Per to talk more about what he’s seeing in this selling season. As we’ve said in our prepared remarks, it’s very early in the selling season, we are not going to provide any numbers around retention rates. We just think it’s way too early to talk about that with where we are at, and we will certainly talk about that in a more holistic fashion as we approach the fall timeframe.

Per Lofberg – EVP, CVS Caremark Corporation and President, Caremark Pharmacy Services: I think the network question is clearly on the table, and I think it’s, I think, in part put on the table by the Express Walgreen’s situation and I think what many customers have realized is that you can actually serve the market very successfully with less than all of the stores around the country, and quite candidly Express has done a nice job really managing transitions of their Retail customers over to other participants in the network. So, it is a viable option for customers where they will be looking at due to the benefits of the savings that they can get from narrowing down the network somewhat, and they will kind of look at those benefits compared to other types of saving opportunities that are available to them through plan designs and that sort of thing. So, I truly expect there to be a healthy discussion around network options as we get into this year’s selling season.

Lisa Gill – JPMorgan: Can you help us, Per, to understand what level of savings a customer is looking for? I think that Walgreen’s has publicly said that customers won’t glue for less than 5%. Our experience has been that that’s not the case, but perhaps you can give us some insights into the level of savings people are looking for, for a more narrow network?

Per Lofberg – EVP, CVS Caremark Corporation and President, Caremark Pharmacy Services: Well, I think to get a 5% savings, you have to make very drastic cuts in the network. But this business is very price sensitive as you know and customers will value a lot top line reductions of 1%, 2%, 3%. If your health plan spends $1 billion on prescription drugs, a 1% saving is $10 million and 2% savings is twice that. So, it is very meaningful and I think is clearly sort of worth consideration by customers.

Larry J. Merlo – President and CEO: At least I think the wisdom that has been out there was a 2% to 3% number and I think to Per’s point that the paradigm that existed in terms of customer disruption we’re kind of living a learning laboratory and Express has done a very effective job in terms of managing client and member disruption that I think it’s possible as a result of that that you could see clients evaluate what it for 1% savings because the disruption is just not what people thought it might be.