What it means
Crawford trained as an accountant and went on to hold senior roles in the healthcare industry. In the early 1990s he joined Charter Medical, a hospital operator that was working its way out of bankruptcy, and helped steer it through restructuring.
That company later combined with another healthcare services firm. In the late 1990s he became chairman and chief executive of MedPartners, a physician practice management company that was struggling.
He led it through a major change of focus, and the business became Caremark Rx, which concentrated on managing prescription drug benefits for employers and health plans. A pharmacy benefit manager (PBM, a company that negotiates drug prices and processes prescription claims for health plans) sits between drug makers, pharmacies and the payers.
Its economics depend on scale, because larger volumes give more bargaining power with suppliers. This is the context in which the Caremark and CVS combination, completed during his time as chief executive, was seen as a vertical merger linking a benefit manager with a large pharmacy chain.
After stepping down from the combined company, he formed an advisory firm focused on investment banking and strategy. He has also served as a trustee of a university.
For a student of finance, the interest lies in the pattern rather than the person. Turnarounds typically involve cutting losses, selling non-core assets, renegotiating debt and refocusing on the most profitable part of the business.
Readers should treat the details of any individual's career as public-record background and check primary sources for specifics. Another reason the career is studied is the scale of the numbers involved.
Healthcare services companies often have thin margins on very large revenues, so a small improvement in purchasing terms or a modest cut in overheads can produce a large change in profit. Analysts therefore pay close attention to cost control and negotiating power.
In practice
Real-world examples.
Example
A private equity investor studies how a struggling healthcare services company was refocused on one profitable business line. She uses the pattern to decide which parts of a similar distressed target to keep and which to sell.
Example
A corporate development team at a pharmacy chain considers merging with a benefit manager. Analysts compare the case with earlier combinations to estimate cost savings from bigger purchasing volumes and the risks of regulatory scrutiny.
Example
A business school instructor teaches a session on leadership in restructuring. She asks students to work out which actions, such as selling units or cutting overhead, would free the most cash in the first twelve months. The class then compares their answers with how real restructurings are usually sequenced, starting with cash preservation, then asset sales and finally a longer-term growth plan.
Case study
Seen in the real world.
Brightmed Services is an illustrative, fictional healthcare company with three divisions, one of which, a pharmacy benefit unit, earned most of the profit while the others lost money. The new chief executive, whose approach resembled the turnaround pattern associated with leaders in this industry, proposed selling the two weaker divisions and concentrating on the benefit business.
The sales raised $300,000,000, which was used to repay debt that carried an interest rate of 9%, saving $27,000,000 a year in interest. With a simpler structure, the fictional company could negotiate better terms with suppliers. The illustrative lesson was that focus can create more value than diversification when parts of the group destroy cash.
A final lesson, framed by the fictional board, was about timing. The sale of the weaker divisions was completed within a year, because delay would have allowed losses to continue draining cash, and the illustrative company used the proceeds before interest costs climbed further.
Watch out
Common mistakes.
- Treating a biography as a complete explanation of a company's results, when markets, regulation and timing also played a part.
- Assuming every merger described as a success creates value, when many fail to deliver the promised savings.
- Confusing a pharmacy benefit manager with a pharmacy, when the manager negotiates and administers drug benefits and may or may not own pharmacies, which is why the ownership structure matters when assessing conflicts of interest.
Questions
People also ask.
What is a vertical merger?
It is a combination of companies at different stages of the same supply chain, such as a benefit manager and a pharmacy chain, as opposed to two direct competitors.
What does a pharmacy benefit manager do?
It negotiates prices with drug makers and pharmacies, processes claims and designs the list of covered medicines for employers and health plans.
Why do analysts study turnaround leaders?
Their decisions on asset sales, debt, management teams and strategy offer practical lessons on how distressed businesses are restored to profitability, including which businesses to keep, which to sell and how to repair the balance sheet.
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