Question

Evaluate the post-acquisition integration methods that CVS uses to create an integrated offering. Why has the company been successful in its integrations processes after acquisitions?

Extending Dominance in the Pharmacy Industry: The 2000s

CVS began the new millennium where it ended the old, in acquisition mode. CVS added a specialty pharmacy to the mix when it bought Pittsburgh’s Stadtlander Pharmacy in July for $125 million in cash. Stadtlander, with an annual revenue of $100 million, operated as a specialty pharmacy.29 Stadtlander generated its earnings through a diferent business model; where a CVS pharmacy sold high-volume drugs at thin margins, specialty pharmacies dispensed highmargin drugs to patients with chronic, dificulty-to-treat, or exotic conditions. CVS continued to expand its network of traditional pharmacies as well, with its purchase of 1,260 Eckerd stores in 2004 for $2.5 billion. Eckerd expanded CVS’s footprint into the Sunbelt states of Florida and Texas. CVS also acquired Eckerd’s mail-order pharmacy operations. With this acquisition, CVS became the largest pharmacy in number of stores, with more than 5,000 compared to Walgreen’s 4,300. CVS executives continued to position the company for growth in a new and expanding economy. In 2005 the company partnered with MinuteClinic to begin ofering a new service to customers. Steve Pontius, Rick Krieger, and Doug Smith started QuickMedx (later changed to MinuteClinic) as a kiosk in a Minneapolis Cub Foods grocery store in 2000. QuickMedx used nurse practitioners and physicians’ assistants to diagnose and treat common ailments such as strep throat, pink eye, ear or sinus infections, and do early pregnancy testing. The company marketed itself with the slogan “You’re sick, we’re quick,” and ofered consumers convenient and fast care for a flat fee of $35.30 CVS hoped to establish MinuteClinics in a number of its traditional pharmacies. MinuteClinic would move CVS from a pharmacy provider to an overall health care provider, with the possibility of third-party reimbursement for clinical, as well as pharmacy, services. CVS purchased MinuteClinic in mid-2006 for $170 million.31 CVS ended the year just shy of $44 billion in total revenue. As 2006 drew to a close, CVS launched its most aggressive move yet, bidding $21 billion (all stock) for outstanding shares of Caremark. Caremark provided PBM services to a network of 60,000 retail pharmacies, and managed drug benefits for a number of large employers such as the 4.5 million federal government employees, retirees, and their families. By contrast, PharmaCare, the inhouse CVS PBM, counted the Chrysler Corporation as a large client with 183,000 enrollees.32 With the acquisition, CVS would extend its reach and power in the “back of the house” part of the pharmacy business. Coupled with CVS’s 6,300 retail pharmacies, the CVS/Caremark combination could combine customer-based services in ways that pure PBM companies could not. CVS made its bid in November 2006, shortly after Walmart announced plans to sell generic prescriptions for $4 through its in-store pharmacies. The Walmart announcement had driven shares of Caremark down by 17%.33 The country’s other PBMs took notice of the potential disruption and one, Express Scripts, launched its own $26 billion (cash and stock) bid for Caremark, a premium of 15% over the CVS bid. Express Scripts wooed shareholders with the promise that an Express Scripts/Caremark combination would provide at least $100 million in additional costs savings (and profit) for Caremark over what it would get through the CVS ofer. Express Scripts would also combine its strengths in prescription management with Caremark’s mail order and specialty pharmacy strengths. With a market cap roughly one-third of Caremark’s ($9 billion to $23.45 billion for Caremark), Express Scripts would fund the deal by increasing the debt load on its balance sheet. Express Scripts leaders hoped to negotiate a cooperative agreement, but indicated a willingness to engage in a shareholder vote if needed. Negating the merger agreement with CVS would cost Caremark a $675 million termination fee. Afer four months of contesting the merger, which eventually went to a shareholder vote, Caremark chose to accept the now $26.5 billion bid from CVS.34 A deal with Express Scripts faced uncertain prospects in an anti-trust review, but the merger with CVS would create a complementary vertical merger rather than a horizontal one. Express Scripts would eventually buy Medco for $29 billion in 2011, becoming the largest PBM company with revenues of $116 billion.35 CVS and Caremark would both benefit through larger size and greater negotiating leverage. CVS gained access to Caremark’s excellent mail order and specialty operations, while Caremark could now ofer its customers promotions and discounts at CVS retail outlets. During the next three years, CVS would invest $110 million in new information systems to help integrate the two companies.36 CVS changed its name to CVS/Caremark and was a market leading competitor in both the retail and PBM segments of the industry. Exhibit 4 provides selected financial data on CVS for from 2009-2014.

Charting New Territory: The 2010s and Beyond

CVS/Caremark continued to grow through acquisition. In 2008 the company extended its reach into the Western United States and Hawaii with a $2.9 billion (cash tender ofer) acquisition of 541 Long’s Drugs.37 With a new focus as a health care provider, CVS took the name CVS Health as it continued to move into new markets. Its 2014 purchase of Coram for $2.1 billion represented an extension of its specialty pharmacy business into the specialty infusion niche. CVS hoped to win in this new segment by reducing patient therapy costs (its own data indicated that homebased infusion treatments cost less than hospital or clinic-based ones), bringing order and scale to this fragmented, emerging segment, and capitalizing on the expected growth in infusion therapy. Several infusion-based drugs looked to become top-10 selling drugs by 2020. 2015 brought further activity with the $12.7 billion dollar purchase of Omnicare, the largest provider of pharmacy services to nursing homes. Omnicare took CVS into the institutional pharmacy segment, the only area of the business where CVS had no presence. Larry Merlo commented on the Omnicare deal: "With this acquisition, we will significantly expand our ability to dispense prescriptions in assisted living and long-term care facilities serving the senior patient population. And again, with the population aging, more people are projected to use assisted living facilities and independent living communities in the coming decades, creating a substantial growth opportunity for us."39 The June purchase of 1,600 Target pharmacies for $1.9 billion extended the company geographically in all 50 states, and it gave the chain a brand presence inside locations that might be viewed as competition. Target gained immediate scale on its pharmacy operations and access to the CVS Health PBM network; likewise, CVS would now boast the largest retail pharmacy chain with 9,500 locations.40 One out of every five retail pharmacies would now be owned and operated by CVS. With the Target acquisition, CVS would gain another venue to place MinuteClinics and other diagnostic services. On the flip side, however, CVS would need to figure out how to create a complementary relationship with the Target brand, merchandise, and retailing philosophy.

Answer 1

Answer:

Post acquisition, CVS rather than changing their method of conducting the business and their offerings, it focused on integrating their products with its products. It has continued to offer the existing customers with the existing offerings in the most cost effective manner. It has reduced the margin and transferred the benefit to the customers that have resulted into the increase of its sales. It has focused on vertical integration rather than the horizontal one. Vertical integration has helped the company in acquiring the market by developing the expertise in the field. Rather than introduction of the new product and focusing on the existing product, it has continued with the offerings of the companies that has been acquired by it and further it has charged less cost for its products by reducing the margins and attaining economies of scale to increase its revenues.