Walgreen Vs. CVS Caremark: When Partnerships Turn South (WAG, CVS)

Sometimes little surprises are just as interesting as big ones. For example, Walgreen Co. (NYSE:WAG) has announced that it would not accept either new or renewal business from prescription drug plans administered by CVS Caremark Corp. (NYSE:CVS). Existing plans are not affected.

Walgreen specifically called out CVS Caremark’s requirement that patients with chronic conditions to use CVS pharmacies or mail-order facilities. The company also cited lack of timely information on new plans added to by CVS Caremark and — the kicker — “the growing unpredictability of CVS Caremark reimbursement rates to Walgreens.”

CVS Caremark, of course, issued a dueling press release. It said it was “surprised and disappointed” at Walgreens’ decision, and called it “a transparent effort to raise its reimbursement rates at the expense of plan sponsors and members and illustrates an inability to adapt to the demands of the marketplace in today’s challenging and rapidly evolving health care environment.”

The news sent CVS Caremark shares tumbling more than 8% yesterday, and CVS shares are down again marginally today despite a small market recovery.  Walgreen has more than 7,500 stores in the US, about 12% of the total in the CVS Caremark network. That could turn out to be a substantial hit as plans come up for re-negotiation.

The Wall Street Journal notes that many independent pharmacists have complained that CVS Caremark is steering its benefits management clients to CVS retail stores, and that the Federal Trade Commission and 24 states are looking into the company’s business practices.

The pharmacy-benefits plan management segment of CVS Caremark is integral to its business. Of the company’s $24 billion in first quarter revenues, half came from its services segment. Walgreen has no such segment and its first quarter revenues totaled $17 billion.

Knocking CVS down a peg or two won’t break any hearts at Walgreen. And the company could come up a double winner if CVS Caremark clients demand that the benefits manager get Walgreen stores back into the network.

Paul Ausick