CVS, Medco paths diverge on retailing

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NEW YORK (Reuters) - Shares of CVS Caremark Corp <CVS.N> have soared 35 percent this year, but you might excuse investors for wishing their money had been elsewhere in 2007.

By Lewis Krauskopf

NEW YORK (Reuters) - Shares of CVS Caremark Corp <CVS.N> have soared 35 percent this year, but you might excuse investors for wishing their money had been elsewhere in 2007.

The share price gains of CVS Caremark -- the newly merged drug-store chain and pharmacy benefit manager -- have been outpaced by the 80 percent increases of independent benefit managers Medco Health Solutions <MHS.N> and Express Scripts Inc <ESRX.O>.

As investors mull which business model is best for future returns, leaders of Medco and CVS Caremark staked their claim on the value, or drag, of owning a retailing arm in separate interviews at the Reuters Health Summit in New York.

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CVS shook up the healthcare world with its $24 billion takeover in March of Caremark, leading to speculation that the combination of major retailer and a benefit manager -- which administers prescription benefits for employers and health plans -- could create a defining strategic model.

But Medco CEO David Snow has no such designs. Snow said he sees a possible conflict of interest with such a combination, and flatly declared that he does not want to be a retailer.

With a chain of pharmacies, a pharmacy benefit manager would be motivated to lure people to their stores, as opposed to other pharmacies in their network, Snow said.

"I always worry about conflict of interest," Snow said.

"If all of a sudden, I'm beholden to a 20 percent of the retail network ... am I going to be managing that set of brick and mortar assets the same way I would if I were Switzerland and I had equal relationships across the 60,000 stores?"

PBMs also operate large automated pharmacies that deliver medicines by mail, and Snow questioned whether being responsible for retail stores would undermine the mail operations.

"Are you driving people away from the cheapest scenario and the higher clinical value scenario -- which is mail -- back to the retail brick and mortar because you want the foot traffic and you want the front-end sales?" Snow asked.

CVS CEO Thomas Ryan brushed off any such conflict as a "non-issue."

"I've met with all our clients. We never talk about conflict of interest," Ryan said.

"The payor doesn't care about channel conflict," Ryan said of retail versus mail. "What they care about is: What's my per member per month fee, are you taking care of my employees or members, and are you helping me lower my overall healthcare costs."

Ryan said a retail arm gives an edge over rival PBMs because it better enables a personal touch.

"Our biggest advantage to existing PBMs: We have everything they have and more and we have 6,500 stores, 20,000 pharmacists where they can get face to face."

For example, Ryan said, CVS can reach diabetics in multiple ways to make sure they are staying compliant with their drugs, testing their blood sugar levels and otherwise staying on top of their disease.

The company is planning to open about 300 in-store health clinics a year as it targets a total of about 2,500, Ryan said.

"We can reach you by phone, by mail, by Internet, but we can also require you to go in once a quarter to the store and see a nurse practitioner or pharmacist who specializes in that," Ryan said.

Medco believes it has its own answer to managing chronic conditions like diabetes: training pharmacists to specialize in certain diseases. Medco is concentrating pharmacists different disease areas in 14 therapeutic resource centers.

"Pharmacists, just like any generalist, can only be a mile wide and an inch deep in knowledge," Snow said. "But the knowledge domains around these drugs and these diseases is getting so deep we're not really doing the best job possible when we practice as generalists."

Because of the automation with its mail-order facilities, Snow said, "My pharmacists spend all their time talking to patients."

"We're big enough at mail that our pharmacists can specialize," Snow said.

Ryan, however, is skeptical of the concept.

"I'm not sure of the importance of having different resource centers," he said.

(For summit blog: http://summitnotebook.reuters.com/)

(Editing by Phil Berlowitz)