CVS Caremark is among four companies vying for a state of Tennessee contract worth roughly $300 million a year to manage pharmacy benefits for 270,000 state employees and their families. Winning such a big contract has become critical for the drugstore chain that retains its pharmacy benefits arm in Nashville.
The company has lost major contracts worth about $4.8 billion around the country in recent months and its stock price has fallen from a high above $44 a share in June 2008 to less than $32 a share this week. It also forecasts a 10 percent to 12 percent drop in the pharmacy benefits unit’s operating profit next year.
The Woonsocket, R.I.-based drugstore chain’s CaremarkPCS Health unit will compete against CIGNA Pharmacy Management, UnitedHealth Group’s Prescription Solutions and Catalyst Health Solutions’ CatalystRx unit for the lucrative state contract. Last week, CVS Caremark won a new contract worth almost $1 billion to continue handling pharmacy benefits for retired Texas teachers.
“It’s not terribly material to them from a financial point of view, but just the fact that they’re winning contracts again gives you some hope that they can turn it around,” Jeff Jonas, an analyst with Rye, N.Y.-based Gabelli & Co., said of the Texas win.
The Tennessee bids will be evaluated with results sent to a committee to pick a winner so the contract can start early next year, said Joe Burchfield, spokesman for the state’s benefits administration. The state plans to switch to a single contract for pharmacy benefits that have been handled by three separate insurers.
Pharmacy benefits managers negotiate drug prices with manufacturers and retailers on behalf of client health plans, employers and government entities.
Having a single vendor could lead to cost savings for the state, including from the winning bidder buying drugs in larger quantities for all plan membersDrugstore chain CVS Corp. of Woonsocket, R.I., and CaremarkRx of Nashville touted their 2007 merger as one that would transform the drug services business. But the company’s recent performance and lost contracts have left investors and many analysts questioning the value of the two-year-old mergerBad marketing?
Some stock analysts say one reason for CVS Caremark’s problems has been its approach to marketing the post-merger company to potential customers. Constant mention of the drugstore side of the business makes employers and health plans nervous about whether they’re being pushed to get drugs at CVS drugstores rather than through other channels, said David Shove, an analyst with BMO Capital Markets in New York.
“They’ve been selling convenience — that you can use the retail stores and get 90-day prescriptions at the retail stores,” Gabelli analyst Jonas said. “But we’re in the middle of a recession. They really need to be marketing low prices rather than convenience.”
Addressing a health-care conference last month, CVS Caremark CEO Tom Ryan acknowledged the company’s marketing message could have been off base, adding, “We need to flip that message around.”
But Ryan said the notion advanced by critics that the drugstore business creates an ethical conflict with CVS Caremark’s pharmacy services and skews prices offered to clients is “baloney.”
Locally, CVS Caremark has lost business, including a pharmacy benefits contract with Vanderbilt University, which on Jan. 1 will switch to Madison Wis.-based Navitus Health Solutions. “Vanderbilt wanted a pharmacy benefits manager that would partner with us to control our prescription drug costs,” said John Howser, its spokesman. “Navitus offers this opportunity.”
Other lost contracts recently included the state governments of Ohio and New Jersey.
How Tennessee works
Under the state’s current arrangement, CVS Caremark manages pharmacy benefits for about 83,506 members in insurer BlueCross BlueShield of Tennessee’s preferred provider plan statewide.
Pharmacy benefits units of CIGNA and UnitedHealth Group’s RxSolutions unit that does business as Prescription Solutions handle services for workers and others enrolled in their respective point-of-service plan and health maintenance organizations.
CIGNA claims to handle services today for 153,000 of the overall 270,000 state employees, dependents and others.
CatalystRx, the fourth bidder for the state’s pharmacy benefits services contract, has several state clients and is known to be a player in that niche.
Stock analyst Jonas of Gabelli & Co. sees CVS Caremark and Catalyst as the two front-runners for the Tennessee contract.
But the stakes for CVS Caremark remain especially high here, considering lingering concerns about its business model, another analyst said.
“It isn’t going to make the difference between profitability and non-profitability,” said Shove of BMO Capital Markets. “But you need to get as much business as you can.”
