The Revco Upside
Potential
In February 1997, CVS announced the
largest acquisition in the history of the
drug chain industry its agreement to
buy Revco D.S. Inc. in a $2.8 billion stock
transaction. While many companies could
have trouble assimilating an acquisition of
that size, CVS' management expertise and
technological advantages help ensure a
smooth transition.
The acquisition meets all three of the
company's often-stated criteria: it is
expected to be immediately accretive,
after one-time charges; it provides leader-
ship positions in new markets, in particu-
lar the Southeast and Midwest; and it
offers significant upside potential by com-
bining the expertise of both companies to
further enhance operating performance.
Significant, hard-cost savings are already
being seen. CVS is projecting a $40 mil-
lion partial-year savings in 1997, with
$100 million in annual operating savings
beginning in 1998. These hard savings do
not include other expected synergies from
purchasing power or revenue enhance-
ments. CVS plans to close Revco's Twins-
burg, Ohio, office by the end of the year.
By then, all administrative backend systems
will be fully integrated so that all purchas-
ing, marketing and advertising decisions
can be made out of CVS' Rhode Island
headquarters.
The upside potential from the merger is
significant as CVS increases growth and
profitability by narrowing the perfor-
mance gap between the two companies.
Consider: Revco's sales per square foot
are about 40 percent lower than CVS'.
Prescriptions filled per store are 20 per-
cent lower. Front-store comps at Revco
run at 0 to 1 percent, while CVS' run at
3 percent to 5 percent. Additionally,
Revco's EBITDA margin is 100 basis
points lower than CVS'.
By integrating CVS' successful merchan-
dising and marketing programs as well as
its convenient and appealing store layout,
CVS should be able to boost these Revco
figures and narrow the performance gap
between the two chains.
The Managed Care Solution
Over the past few years, the most important change in the healthcare system
has been the rapid growth of managed care. More than half of all Americans
participate in a prescription benefit management (PBM) program, and more
than 50 cents of every retail prescription drug dollar is paid for by a PBM.
CVS' success in serving the managed care industry has been driven by its
unique, integrated approach that brings together physicians, pharmacists,
pharmaceutical companies and managed care providers to deliver the best
care at the lowest cost.
PharmaCare, CVS' PBM subsidiary, provides the full scope of prescription
benefit management services. It also offers innovative information products
such as CIMS, its Clinical Information Management System. By providing
prompt and easy access to patient histories, medical professionals can use the
most cost-effective drug therapies. CIMS has yielded one of the industry's high-
est conversion rates to safe, cost-effective drug therapy alternatives. Being the
largest deliverer of pharmaceuticals as well as a PBM gives CVS a strong posi-
tion with third-party payors and pharmaceutical companies. CIMS also
enables CVS to move prescription market share at the retail level.
CVS has a unique healthcare offering, including the largest retail/mail PBM in
the country with 7.5 million lives handled. That now can be leveraged across
4,000 stores -- offering consumers greater value through lower prices and
higher quality programs.
CVS' mission is to be the most convenient and coordinated pharmacy healthcare
provider in its markets. It has formed a joint venture with Pfizer, and alliances
with Bristol Myers Squibb, Harvard Pilgrim, and the University of Pennsylvania, to
name a few.
The combined CVS/Revco creates a powerful combination and one that is
well-positioned to take advantage of the growth opportunities in health care
and managed care.
