Walgreen Co said it will not be a provider for any new or renewed drug plans handled by CVS Caremark Corp's pharmacy benefits manager, which it said favors CVS pharmacies.
CVS shares fell 8 percent in a blow to its pharmacy benefits management (PBM) business, which administers prescription drug benefits for employers and health plans, and operates a large mail-order pharmacy. Walgreen shares were down nearly 2 percent.
Some analysts see Walgreen's decision as a negotiating tactic to obtain more favorable terms from CVS. Other analysts say, however, that CVS has less to lose than Walgreen, which obtains about 7 percent of its revenue from the pharmacy business with CVS.
Walgreen said the move would take several years to affect all of its business with CVS.
Since PBM contracts usually last for an average of three years, the full impact from the decision won't be felt for some years, said Walgreen spokesman Michael Polzin.
In a letter explaining its move, Walgreen cited examples such as CVS's promotion of prescription drug plans for patients with chronic conditions that requires them to use CVS pharmacies or Caremark mail service over Walgreen drugstores.
Walgreen further said it receives little information when CVS transfers drug plans to a new network or when CVS obtains new drug plans as clients.
It also said CVS Caremark's reimbursement rates to Walgreen were increasingly unpredictable, often did not reflect market rates and made it unacceptably difficult for Walgreen to plan its business.
Walgreen's move does not affect current CVS Caremark plans in which Walgreen participates, only new plans or renewals.
CVS, which bought Caremark for $27 billion in 2007 to expand its PBM operations, said it met with Walgreen officials recently and is still open to discussing these issues.
Bernstein Research analyst Helen Wolk said Walgreen's actions represent an aggressive negotiating tactic to win increased reimbursement from Caremark.
Walgreen, with an 18 percent market share, is the biggest chain in the retail pharmacy market, and CVS faces a relatively light year in 2011 with 16 percent of its PBM agreements up for renewal, Wolk wrote in a note to clients.
We expect the two companies to come to an agreement before long, which likely will include increased reimbursement for WAG, she said.
Walgreen's decision was more of a near-term hiccup for CVS Caremark, analyst George Hill of Leerink Swann Research said. He sees rivals Express Scripts and Medco Health benefiting as clients look to offer their members more pharmacies from which to choose, leading to a shift in market share.
Medco shares were up 3.5 percent Monday afternoon, while Express Scripts was up 5.3 percent.
CVS, which said it was surprised by Walgreen's decision, has struggled to make its combined business realize its expected potential.
Late last year, its PBM business lost $4.8 billion in contracts. CVS is also the subject of a Federal Trade Commission investigation into its business practices.
But some analysts think Walgreen has more cause for worry.
Even without Walgreens within their network, CVS has a broad footprint of pharmacies, and members would have enough other alternatives to fill their prescriptions, said JPMorgan analyst Lisa Gill in a research note.
(Reporting by Nivedita Bhattacharjee; Editing by Michele Gershberg, Lisa Von Ahn, Matthew Lewis and Steve Orlofsky)