Wednesday, June 16, 2010

CVS-WAG: Escalation and Bridge Burning

Walgreen’s (NYSE:WAG) battle with CVS Caremark (NYSE:CVS) escalated sharply yesterday. Does this posturing and bluster mean that a resolution may be closer than it appears?

Perhaps. “Burning your bridges behind you” is a well-known strategy for demonstrating commitment. Succeed or perish, goes the theory.

CVS Caremark and Walgreen are (hopefully) negotiating some sort of resolution to this debacle behind closed doors. In public, we are witnessing each side signaling an intention to stand their ground as way to force the other side to compromise.

I see the next big deadline as next Tuesday’s earnings conference call from Walgreen. Consider these four possibilities, in order of decreasing attractiveness to Walgreen:
  • Walgreen reconciles with CVS Caremark
  • Walgreen announces a truce that postpones the July 9 deadline
  • Walgreen makes a market-shaking announcement that strengthens its bargaining position, such as a mega-acquisition (Rite-Aid?) or a new direct-to-payer deal
  • Walgreen spends the entire earnings call explaining why they picked this fight in the first place and how much they stand to lose. Ouch.
Here’s a rundown of the latest developments in this kerfuffle:

1) The Wall Street Journal had a great scoop yesterday on Walgreen’s strategies for avoiding more than $7 billion in potential revenue losses. See Walgreen to Honor Existing CVS Caremark Terms. In brief, Walgreen is “willing to honor” existing pricing terms for Caremark beneficiaries. The company is also accelerating its direct-to-payer, PBM bypass strategy.

2) In retaliation, CVS Caremark announced last night that Walgreen would violate its contract by allowing CVS Caremark patients to keep filling prescriptions at Walgreen beyond next month. (source) Hmmm, or else what? CVS Caremark will drop them again?

3) Meanwhile, plans managed by CVS Caremark are getting beneficiaries ready to switch pharmacies three weeks from today. Here are a few examples:
4) Medco finally stated publicly what we all have been thinking. Namely, this whole mess will be a boon to the pure-play PBMS such as Medco Health Solutions (NYSE:MHS) and Express Scripts (NYSE:ESRX). Glenn Taylor, Medco's group president for key accounts, said: “When they think that their members could be disrupted, then they look for solutions to not have that service component disrupted. As long as they can provide it at a fair price, I think that will help the independent PBMs." (source) A good helping of spin in his statement, but nonetheless interesting.

The drama continues…

9 comments:

  1. AnonymousJune 16, 2010

    Hello Adam.
    Five bucks the WAG deal goes nowhere.

    ReplyDelete
  2. AnonymousJune 16, 2010

    How about a deal with Express Scripts or Medco? I see Walgreens trying to set up a Maintenance Choice type network with one of the other pure-play PBMs. Any thoughts?

    ReplyDelete
  3. AnonymousJune 16, 2010

    If the Walgreens earnings call is anything like their call to announce the pull-out from the CVS Caremark network, I'm afraid it'll most closely resemble your fourth (and least attractive) possibility.

    Appreciate your use of the word "kerfuffle." Excellent adjective for the situation.

    ReplyDelete
  4. AnonymousJune 16, 2010

    The lesson for Walgreens...Don't pick a fight you can't win!

    I'll second the vote for "kerfuffle."

    ReplyDelete
  5. AnonymousJune 16, 2010

    I suspect CVS brings up this "contract violation" because WAG can probably still make money on generics administered to CMX plan members just off the copay. I've been told that goes on now.

    ReplyDelete
  6. AnonymousJune 17, 2010

    CVS is under investigation by about 25 different states attorney generals for antitrust and is being sued by its shareholders over securities violations. Also, CVS agreed in March to pay 36.7 billion settlement for medicare billing fraud. WAG will recover within a quarter - year at most.

    ReplyDelete
  7. AnonymousJune 17, 2010

    kerfuffle

    May be an understatement, should the PBM move forward without a large chain.
    It will put pricing pressure on the large chains that they will surely not like.

    What is the saying "the enemy of my enemy is my friend".
    I never liked that strategy.

    ReplyDelete
  8. AnonymousJune 18, 2010

    Wow. 36.7 billion. That's an awfully big settlement.

    Does that mean sales at CVS last year hit close to a gazillion?

    ReplyDelete
  9. AnonymousJune 18, 2010

    CVS paid $36.7 "million" to settle for fraud in March. Wow. you didn't use a dollar sign - so that's an awfully big settlement (duh!)

    ReplyDelete

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