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VIDEOEnd of Walgreen, CVS Relationship Aids Pharmacy Benefit Managers
Walgreens says CVS has been steering pharmacy business to its own retail operations. How the dispute helps Express Scripts, Medco Health Solutions.
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Walgreens (WAG) came out swinging Monday morning when the company issued a letter to its rival CVS Caremark (CVS) stating that it will no longer participate in any new and renewed prescription drug plans awarded after June 7 to CVS Caremark’s pharmacy benefit manager.
“Walgreens participates in hundreds of pharmacy benefit networks, which serve an important function in the marketplace by providing comprehensive access to prescription services for patients in prescription drug plans across the country,” said Walgreens CEO Greg Wasson. “Unfortunately, as a result of CVS Caremark’s pharmacy benefit management practices toward Walgreens, it no longer makes good business sense for Walgreens to be part of their network for new and renewed plans.”
Pharmacy benefit managers exist in the US to serve as a third-party administrator for prescription drug plans; providing prescription mailing options, pharmacy networks, and negotiations of discounts and rebates with drug manufacturers.
According to Walgreens, CVS has been unfairly steering pharmacy business to its own retail operations since acquiring the Caremark operations three years ago. The drugstore giant also accuses its rival of keeping it out of the loop when it comes to pricing information and the acquisition of new prescription drug plan clients.
On CVS’ part, this is just a creative way of driving more customers to its retail stores, while also limiting the amount of reimbursements its competitors receive. (CVS didn't respond to requests for comment.) Yet, the implications of these questionable (albeit effective) business practices are wide-ranging.
First and foremost, the plan has worked: CVS has gained some of Walgreens’ customers. “If you look at Walgreens recent sales performance, it hasn’t been good,” says Thomas Weisel Partners analyst Steven Halper. “One reason is that CVS is gaining market share in the markets where the companies overlap, which is about 40% of markets.”
Yet, Halper believes that the withdrawal of Walgreens from the Caremark program will have a greater effect on the CVS bottom line. It's currently the season where prescription benefit managers like Caremark negotiate with their clients and renew contracts. Walgreens is a huge drug store retailer with 7,500 stores across the US -- this move takes those thousands of stores out of the equation for any businesses that sign up to the Caremark plan. This could seriously affect renewal rates since many plan providers will want to provide patients with as many pharmacy options as possible. Caremark usually renews about one-third of its prescription drug clients. Halper believes that this pullback from Walgreens could keep as much as 25% of those usual renewals from joining Caremark again -- amounting to a decline of $0.36 per share in earnings over the next three years.
How this affects Walgreens and CVS won’t really be seen until the third quarter when Caremark announces how much of its prescription drug plan clients have re-upped and when Walgreens’ earnings reflect the withdrawal of Caremark customers from its pharmacies. (Walgreens said that 7% of its total revenues are related to CVS Caremark pharmacy claims -- about $4.6 billion annually.)Yet, expect to see immediate benefits for two other pharmacy benefit managers -- Express Scripts (ESRX) and Medco Health Solutions (MHS) -- which should start to gain customers as employers and health plans flock to new options that will provide patients with more pharmacy options.
So far, this battle seems like a lose-lose for Walgreens and CVS, but a major win for their competitors.Twitter: @biowriterchik
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