NEW YORK (AP) — Drugstore chain Walgreen Co. said Monday it will end its relationship with competitor CVS Caremark’s pharmacy benefits management business because of complaints about prices and policies designed to drive customers toward CVS stores.
The decision does not affect current Caremark plans, but if Walgreen stands by its decision, it won’t handle any Caremark-managed prescriptions in about three years. Walgreen said it will not participate in plans that are awarded to Caremark or contracts renewed with Caremark starting Monday.
Walgreen is the largest U.S. drugstore chain in terms of locations and revenue, slightly ahead of CVS Caremark Corp. It runs more than 7,500 stores across all states, along with Puerto Rico and Washington, D.C.
The company said it is giving up billions of dollars in revenue with the move, although the full effects won’t be felt for a few years. The company said it gets about 7 percent of its annual sales from Caremark plans. That share amounted to about $4.5 billion in fiscal 2009.
CVS said it was “surprised and disappointed” by the decision and had recently discussed these subjects with Walgreen’s management. It said it is open to additional talks but added that Walgreen is trying to squeeze Caremark into giving better reimbursement rates.
Walgreen, based in Deerfield, Ill., said it does not get enough information from Caremark about new prescription drug plans and contracts. That makes it hard for Walgreen to decide if it makes financial sense for it to participate in the plan. Walgreen said it plans to put more effort into marketing its own programs, including health and wellness plans and worksite pharmacies.
Walgreen singled out CVS’s Maintenance Choice program for criticism. Maintenance Choice is a major program through which Caremark beneficiaries can either pick up 90-day prescriptions at CVS pharmacies or get them delivered through the mail. The program is for patients with chronic illnesses who need regular supplies of medications.
Walgreen said Maintenance Choice “disrupts networks by requiring patients with chronic conditions in many plans to use CVS pharmacies or Caremark mail service facilities for their prescriptions.” It also said Caremark’s approach to Walgreen within the CVS Caremark retail network has “fundamentally changed” in the three years since the CVS-Caremark merger.
CVS and Caremark combined in early 2007. The company’s goal is to negotiate lower prices on prescription drugs and bring more customers to CVS stores through plans like Maintenance Choice. But critics alledge CVS and Caremark have a conflict of interest and reduce customers’ options.
Walgreen cited the “growing unpredictability” of CVS Caremark’s reimbursement rates and said payments for certain drugs don’t reflect the market. CVS counters that Walgreen is reimbursed at rates comparable to other national chains, including CVS’s own stores.
SunTrust Robinson Humphrey analyst David Magee said he thinks there is a good chance CVS and Walgreen will renegotiate their reimbursement rates to give Walgreen a better deal. He estimates Walgreen could lose 5 cents to 8 cents per share in profit in calendar 2011 if it does not reach a new deal with CVS.
But if they can’t reach an agreement, Caremark could have trouble winning clients over to a network that does not include the biggest drugstore chain in the country. As a result, it could lose contracts to competitors, bringing that business back to Walgreen as the 2011 pharmacy benefit manager selling season is under way.
Magee added that the announcement is “a black eye for CVS” after all the focus on Caremark’s struggles over the last year. CVS disclosed $4.8 billion in contract losses and $1.7 billion in Medicare-related losses in late 2009 as many big customers took their business elsewhere, citing pricing and customer service among other reasons.
Shares of Woonsocket, R.I.-based CVS sank $2.79, or 8.2 percent, to $31.01 in afternoon trading Monday. Earlier they traded as low as $29.62. Walgreen shares fell 69 cents, or 2.2 percent, to $30.15.
The news sent shares of other pharmacy benefit managers higher, however. Shares of Express Scripts jumped $5.38, or 5.4 percent, to $104.51, while MedcoHealth Solutions Inc. climbed $2.09, or 3.7 percent, to $58.90.
