Walgreens, CVS Caremark end public spat, agree on new pharmacy benefit management deal

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Walgreen said it had concluded that it was no longer in the best interests of its customers, pharmacists, and shareholders to grow its future business with CVS Caremark. "It has become increasingly clear to us that Caremark's approach to Walgreens as a community pharmacy within CVS Caremark's retail network has fundamentally changed, and we are no longer viewed as a valued community pharmacy within its PBM network," Walgreens executive vice president of pharmacy Kermit R. Crawford said. Walgreen indicated that CVS Caremark's position as both a customer and competitor to its retail pharmacy network presented a fundamental conflict of interest.

The same day CVS Caremark responded by accusing Walgreen of taking steps that made it "a high cost pharmacy provider and disrupt members."

Walgreen's move, CVS Caremark said, "is nothing more than 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."

Two days later, CVS Caremark said it planned to cut 7,000 Walgreen stores from its 64,000-strong PBM network.

The same day, Walgreens' CEO Greg Wasson said CVS Caremark's decision would not hurt Walgreen's business in any way. "We've made our decision," Wasson said in an interview with Reuters. "We certainly didn't take this lightly. Unfortunately they've decided to disrupt the existing patients that we serve for them."

According to Wasson, only 7 percent of the company's revenue come from CVS drug plan business and increased business from its other clients would offset the loss.

CVS Caremark' CEO Tom Ryan responded that Walgreen's exit from its PBM network would not hurt the company. "[We] are confident that through our remaining valued network partners, we will continue to provide excellent geographic coverage for our clients and their members across the country," Ryan said in a statement. "We will continue to provide convenient and affordable pharmacy care to members, and we are committed to a smooth transition of affected members to other pharmacy providers in our networks."

Though both the companies maintained a brave face, it was clear that the acrimonious dispute was threatening to erode their earnings and was already affecting the share prices of the companies.

While analysts at Thomas Weisel downgraded Walgreens' rating to "market weight" from "overweight," CVS risked thousands of potential customers being turned away from its doors and going to independent PBM rivals like Medco Health Solutions Inc. and Express Scripts.

"In places where Walgreen has a lot of market share, like Minneapolis, New York, or San Francisco, it's going to be much more challenging to create a pharmacy network without Walgreen's," warned BB&T Capital Markets analyst Andrew Wolf.

Not surprisingly, the two companies realized that they needed to work out an agreement quickly or see a relationship worth billions of dollars in a way that spited both of them. Americans spend about $250 billion a year on prescription drugs, according to the most recent numbers from the National Association of Chain Drug Stores.

Both Walgreens and CVS Caremark said they were open to talks "in an effort to achieve a reasonable business resolution," and last Friday the two companies said in a joint statement that they had agreed on a new PBM network pharmacy deal that addresses all the issues concerned.

Walgreens said the new deal allows the company to participate in CVS Caremark's PBM "national retail network for existing, new, or renewal plans." The financial details of the new deal were not disclosed.

According to Walgreen's Crawford, the "outcome of this mutual, multi-year agreement" allows the company to meet its "business objectives."

"The agreement makes good business sense, provides the framework we need to operate our business going forward, and assures choice and convenience for the many consumers who look to us for quality pharmacy care," Crawford said. "The agreement is good for our patients, pharmacists, and shareholders, and will allow us to continue to meet the needs of our customers across the country through the CVS Caremark network."

In a similar vein, Per Lofberg, president of CVS Caremark's PBM business, said the deal reflects the company's "top priority to provide convenient access to affordable high-quality pharmacy health care."

"This new contract enables Walgreens to continue participating in CVS Caremark’s PBM national pharmacy network, provides enhanced network stability, eliminates any current or long-term disruption for our clients or their members and allows us to continue to fulfill our obligation to deliver cost-effective pharmacy benefits for our clients," Lofberg said.

Shares of Walgreens and CVS Caremark were trading down 6.24 percent and 0.03 percent respectively at $28.26 and $31.77 on the New York Stock Exchange at 11.43am (EDT) on Tuesday.