Rx investments drive surge of long-term growth

Drug Store News,  Oct 10, 2005  by James Frederick

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The pharmacy side of CVS' business is poised for a continuing surge in longterm growth, company leaders are convinced. To maintain momentum, they'll continue to in vest in systems that boost their pharmacists ability to dispense massive volumes of prescriptions more efficiently, while providing a steadily expanding list of patient-care services.

One clear sign of just how critical the pharmacy counter is to CVS is the fact that pharmacy sales now represent roughly 70 percent of the chain's total sales, with about 370 million scripts filled in 2004, versus 72 million in 1996. Sixty percent of the chain's roughly 5,400 stores now offer either extended-hour or 24-hour service, a convenience that pulls in millions of pharmacy customers. So, too, does the ct that 55 percent of its store locations are now freestanding, and four in 10 offer drive-throughpharmacies.

CVS now accounts for 13.8 percent of the U.S. retail pharmacy market, and fills 1 of every 5 prescriptions in markets where it has a presence, according to company figures.

CVS continues to apply automation tools to its pharmacy operation. Such applications as Phase II of the Assisted Inventory Management system, are reducing out-of-stocks in both pharmacy and front end. AutoScript robotic dispensing tools are speeding the filling process at high-volume and mail order facilities. The company's EPIC pharmacy work-flow improvements have yielded a more efficient and less stressful work environment for pharmacists, and have been applied to the former Eckerd stores CVS acquired in July, 2004. So, too, has the chain's robust, interactive pharmacy system, which "can look up and transfer prescriptions from store to store," in the words of Brian Bosnic, area vice president for CVS' Florida region.

A new generation of state-of-the-art distribution centers, which debuted with file opening of a new DC in Ennis, Texas this year, should also boost the effidency and profitability of CVS' pharmacy operation. The Ennis facility "requires half the space of a conventional distribution center and needs one-third fewer people to run it," CVS noted, but it "boosts in-store productivity because it selects and ships products customized to ... each destination store."

CVS has won wide praise for the speed with which it consolidatedits purchase of 1,268 Eckerd stores and converted them to its own pharmacy systems.

"In just four months following the closing date of the acquisition, CVS was able to integrate its systems with Eckerd," noted Merrill Lynch research analyst Patricia Baker, who called the effort an amazing feat ... considering this was a 1,200-store chain." She also noted that Eckerd "has been almost entirely remodeled" since the change in ownership.

Indeed, Baker reported, "Most Eckerd associates have already attended CVS training courses for IT systems, merchandising and loss prevention. As a result, we have already seen a dramatic improvement in wait time for prescriptions [15 minutes or less] by about 18 percent."

Much of those efforts hinge on CVS' Pharmacy Service Initiative. With a pledge to make sure that prescriptions are "ready when promised at any hour, CVS launched PSI in 2003. "Our pharmacy initiatives have freed up our pharmacists to spend more time counseling customers," the company noted in its last annual report. "As a result, customer service scores posted healthy gains in 2004."

Analysts have drawn an upbeat picture of CVS as its integration of the former Eckerd stores moves toward completion. Prescription sales in Florida and Texas, two of Eckerd's largest markets, have turned positive in recent months as CVS applied its powerful economies of scale and marketing machine to the task of boosting performance at the Eckerd stores it acquired last year.

In addition to synergy savings excess of $100 million this year, another major benefit of the Eckerd acquisition in the growth potential arising from the combination of Eckerd Health Services and-CVS' PharmaCare PBM unit.

"The combination of PharmaCare and EHS has created one of the largest PBMs in the U.S., with approximately $2.5 billion in sales and 30 million lives," Baker noted.

PharmaCare is now the nation's fourth-largest PBM, although its revenues are considerably behind those of the No. 3 player, Express Scripts. The purchase of EHS last year also gave PharmaCare a billion-dollar stake in the mail-order pharmacy business through EHS' mail order division.

"The addition of EHS was ... a key factor in, the acquisition [of Eckerd], noted CVS chairman, president and chief executive officer Tom Ryan. "It gives us the unmatched combination of a PBM covering 30 million lives, the industry's leading retail presence, and a specialty pharmacy offering.

As a result, we are strategically positioned to provide all payors--patients, insurers, managed care companies and employers alike--with a complete and flexible pharmacy solution."