In a three-way contest for national drugstore dominance, the success of CVS CEO Tom Ryan at buying and integrating rival pharmacy chains paved the way for a 2007 deal that broke the mold: the $26 billion acquisition of pharmacy benefits manager Caremark Rx Inc. to create CVS Caremark Corp. (NYSE:CVS).
It was a huge and risky bet on a business model that some thought had inherent conflicts of interest. Could customers really rely on the company's PBM unit to extract the best prices from its pharmacy unit? What about the potential for misusing patient information for marketing advantage?
While they have been willing to experiment on other fronts, such as in-store clinics, CVS' national rivals, Walgreen Co. (NYSE:WAG) and Rite Aid Corp. (NYSE:RAD), were conspicuously more cautious when it came to the PBM business.
Thursday's news that CVS Caremark has lost a couple of big PBM clients -- and that its business practices are being
investigated by the Federal Trade Commission -- made that caution look well placed. The news overshadowed better than expected third-quarter earnings, and traders hammered the stock.
In fact, the storm clouds have been gathering for awhile. In July, we
noted that some U.S. senators were asking the FTC to take a look at CVS Caremark's practices, and that their request followed on a complaint from a community pharmacist trade group.
In a Thursday interview with The Wall Street Journal, CFO Thomas Rickard noted the financial significance of the $4.8 billion in net contract loss for next year, but said investors are mistaken if they think anything is "strategically amiss." CVS also announced this week a management shakeup at Caremark.
Rite Aid and Walgreen have both had management shakeups at the highest levels in the course of the drugstore wars. But there are no indications of that at CVS Caremark where
Ryan, a onetime pharmacist who took charge in 1998, runs a company that is very much his creation. As a January 2007
profile in The Boston Globe relates, he was influenced in part by the roll-up successes of Terrence Murray, CEO of Fleet Bank, on whose board he sat in the 1990s, and who now sits on the CVS Caremark board.
In that Boston Globe profile, a quote from Ryan, who was then fending off a rival bid for Caremark from Express Scripts Inc., is worth revisiting.
"It's breaking new ground. It's never been done, so it's harder for the financial community to understand it," Ryan said. "But we will reshape and lead the market."
Nearly three years later Ryan is still trying to help the financial community, to say nothing of regulators, to understand it. Not a good sign. -
Kenneth Klee
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Adele Gulfo
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The interpretation here is spot on. Ryan is incredibly ambitious and bright. But, as is often the case, his hubris overrides his ability to understand the law and the meaning of integrity. The FTC investigation is warranted, in particular when it comes to misuse of patient information. There is ample evidence that the PBM side takes information that has been shared with competing drugstores and uses that to divert business to either mailorder or their own CVS pharmacies. Keep in mind that this is not the first time that CVS has been confused about where the lines are, and how to not cross them. The entire Caremark acquisition was a questionable backroom deal and I believe the state of Rhode Island has a couple of former CVS execs in the pokey. Given that it is their home state, it's hard to believe that nobody in the corner office was privy to the nature of their dealings.