Walgreen Co will not be a provider for any new or renewed drug plans handled by CVS Caremark Corp's pharmacy benefits manager, which it said bypasses Walgreen pharmacies in favor of its own.
CVS shares fell 6.4 percent in the latest blow to its PBM business, which administers prescription drug benefits for employers and health plans and also operates a large mail-order pharmacy. Walgreen shares were down nearly 2 percent.
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, Walgreen Chief Executive Officer Greg Wasson said.
CVS Caremark plans in which Walgreen is already a pharmacy provider will not be affected by the decision.
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 said it received 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.
UBS analyst Neil Currie said Walgreen will lose 7 percent of its prescription business based on current numbers, and that front-end business associated with CVS traffic.
To take this decision is therefore a substantial risk, Currie said, adding that CVS, however, stands to lose potentially nothing.
Walgreen operates more than 7,500 drugstores in the United States and Puerto Rico.
This near-term hiccup for CVS Caremark should serve to benefit Express Scripts and Medco Health as clients look to offer their plan members more expansive pharmacy options, leading to PBM market share shifts, analyst George Hill of Leerink Swann Research said.
Medco shares were up 5.2 percent at midday, while Express Scripts was up 4.8 percent.
JP Morgan analyst Lisa Gill said the move should not lead to significant account losses for CVS, but could raise significant concerns about Walgreen's revenue going forward.
Even without Walgreens within their network, CVS has a broad footprint of pharmacies and members would have enough other alternatives to fill their prescriptions, analyst Gill said.
CVS bought Caremark for $27 billion in 2007 to expand its PBM operations, but has struggled to make the combined business realize its expected potential.
Late last year, its PBM business lost $4.8 billion in contracts, and the president of its unit departed. CVS is also the subject of a Federal Trade Commission investigation into the business practices of the combined company.
CVS officials were not immediately available for comment.
(Reporting by Nivedita Bhattacharjee; Editing by Michele Gershberg, Lisa Von Ahn and Matthew Lewis)