Kicking The Habit: CVS To Stop Selling Tobacco, Sacrificing $2 Billion In Sales For Public Health And Future Growth
CVS, the largest pharmacy chain in the United States, will stop selling cigarettes and other tobacco products in all of its 7,600 stores by October 1, its parent company CVS Caremark CVS -1.03% announced this morning. It is the first time any drugstore has ever dropped this deadly cash cow, and it is part of a major shift in direction for the drugstore giant.
“We’ve got 26,000 pharmacists and nurse practitioners who are helping millions of patients each and every day,” said Larry Merlo, the chief executive of CVS Caremark. “They manage conditions like high blood pressure, high cholesterol, and diabetes — all conditions that are worsened by smoking. We’ve come to the decision that cigarettes have no place in an environment where healthcare is being delivered.”
The decision gained immediate praise from the American Medical Association, the Robert Wood Johnson Foundation, and the American Cancer Society . “Over time, we think lives will be saved by this,” says Cancer Society President John Seffrin. But the public-health-mindedness will cost CVS billions – literally. The company says $2 billion in sales will be shaved off its $125 billion top line. That will pressure earnings, too, though Merlo swears incremental cost cuts will keep those pressures from showing up in its profit statements.
Merlo says that continuing to sell cigarettes, which the Surgeon General blames for 480,000 deaths every year from heart disease, lung cancer, and stroke, was anathema to CVS’ long-term plan to become a central player in the U.S. health care system that interacts ever more closely with patients, giving flu shots, reminding them when they are not filling prescriptions, and, through its 800 Minute Clinic in-store nurse practitioner stations, prescribing medicines. “I see my role as insuring that the company is positioned for growth,” says Merlo. “And that is what this decision is about.”
CVS, like rivals Walgreen WAG +2.77% and Rite-Aid Corporation, is seeing a dramatic change to its business as it focuses less on taking marginal revenue out of drug sales and more on larger agreements with hospitals and insurance companies. In fact, CVS is in the midst of an even bigger shift than its competitors. Because of its 2007 merger with Caremark, the company is not only a drug store chain but also a pharmacy benefit manager, meaning it works with insurance companies and employers to control drug costs. The assumption is that by being a rival to both Rite-Aid and benefits manager Express Scripts ESRX -0.31%, CVS can extract better savings and offer better care to patients, saving employers money both by cutting costs and by making people healthier.
Among CVS’ newer offerings: a deal with insurers through which patients who have not filled a needed prescription, like a hypertension drug, are given counseling from a pharmacist if they show up wanting something else, like an antibiotic. This is possible because CVS has records of both in-store and mail-order prescriptions; unfilled prescriptions cost the medical system $300 billion annually, CVS says. Another new product will help patients sign up for expensive drugs for cancer, rheumatoid arthritis, and other “specialty” conditions, help them figure out how to pay for them, and allow them to either get them in the mail or pick them up at a CVS story.
These new efforts have led CVS to work more closely with hospitals, doctors’ networks, and what are called Accountable Care Organizations, new types of organizations encouraged by Obamacare in which doctors agree to be paid not for every stitch, prescription, or procedure but based on how well patients do after treatment. If CVS can help save money or keep patients healthier, it might get a piece of the action. But these efforts were leading to cognitive dissonance, says Troyen Brennan, a former professor of medicine at Harvard Medical School who is now CVS’ chief medical officer.
“We would always get the question: why do you continue to sell cigarettes?” says Brennan. “Because from the physicians’ and nurses’ point of view, you’re either all in for healthcare or you’re not.” He says he thinks that having been the first pharmacy to drop cigarettes will be a “competitive advantage” against other retail pharmacies because of the credibility it will give CVS when talking to physicians.
It’s certainly getting good buzz from organizations pre-briefed on the announcement. Risa Lavizzo-Mourey, MD, the CEO of the Robert Wood Johnson Foundation, called CVS’ cig ban “a huge and important step forward for moving us as a nation to a place where we can be healthier.” And Robin Koval, the chief executive of Legacy, the foundation formed to stop teen smoking formed when 46 states’ attorneys general settled with tobacco makers, literally said “Wow.”
“For the number one retail pharmacy chain to take a very bold step like this and put people and their health in front of profits sends a signal that if you want to talk the talk about being there to serve your customers and their healthcare needs, then you have to walk the walk,” says Koval.
In the shorter term, the cigarette ban may help with one new business: CVS is offering patients’ smoking cessation therapy, which will usually be paid for by insurance but which some patients will need to pay for out of pocket. Patients will be offered several counseling sessions with a nurse practitioner and perhaps, if they need them, nicotine replacement gums, lozenges, or patches or medicines like Chantix and Zyban that can help patients quit. CVS does not sell so-called e-cigarettes, which vaporize nicotine so it can be inhaled.
Will the halo from the public health praise be enough to make up for the hit to earnings? Maybe. The $2 billion in annual sales lost is only 1.6% of total revenue. In turn, CVS says that this will pressure earnings by 17 cents per share, or 40%, on an annual basis. But because the removal won’t have fully happened until October, that will only hit this year’s earnings by 6 to 9 cents per share. And CVS says it can make up those costs, maintaining its guidance, although that earnings coverage has to come from somewhere. The company is making a bold bet on rebranding itself as being not just a store, but a healthcare company. Arguably, it’s not there yet. But Merlo has established a clear sense of direction, and when it comes to a big, often slow-moving company, that is a good thing.