Thursday, June 10, 2010

CVS-WAG: Going From Bad to Atrocious

CVS Caremark (NYSE:CVS) fought back yesterday by announcing that it would drop Walgreen (NYSE:WAG) from its pharmacy networks in 30 days. Walgreen responded with its own I-know-you-are-but-what-am-I press release response.

Since when does negotiating by press release seem a good idea? Is everyone working with the PR Agency From Hell?

As I told Dow Jones, both parties need to step back from the brink and find a way to resolve this mess while saving face. The loss of ALL Caremark business (~12% of prescription revenues) would be a big financial hit to Walgreen, giving them an incentive to settle quickly. At the same time, I don’t see how Caremark will be able to survive in certain markets without Walgreen. Plus, CVS Caremark will now need to sell the world on a restricted network model without giving up more to retain clients than they save by excluding Walgreen.

Everything in my original analysis from Tuesday still holds true, so first read The WAG-CVS Brouhaha: What's Really Going On.

Once again, I encourage you to read the latest pot shots from the primary participants:

With its latest announcement, CVS Caremark is trying to convince its PBM clients that Walgreen is a high-priced pharmacy provider. Yesterday’s bombshell stated “Walgreens has continued to seek higher reimbursement rates.”

This argument leads directly to the restricted network model, discussed at length in my U.S. Pharmacy Industry: Economic Report and Outlook. A restricted network limits a consumer’s pharmacy options as a way to provide lower costs and/or greater control for the third-party payer.

Maintenance Choice program is being widely adopted by Caremark clients, demonstrating that payers will accept more restricted pharmacy networks for maintenance medication in exchange for savings and control. (See Pepsi, CVS Caremark, and the FTC.) The Caterpillar-Walgreens-Walmart arrangement provides another compelling data point at a large employer with a geographically-concentrated beneficiary population.

Caremark is gambling that (1) clients will accept this restricted model for all prescriptions, not just maintenance medications, and (2) consumers won’t be overly inconvenienced by avoiding their local Walgreens.


IMHO, CVS Caremark is making a major strategic blunder because it’s simply not possible to assemble a credible pharmacy network in certain locations without Walgreen.

Consider the Chicago-Naperville-Joliet, IL-IN-WI census area, where 9.6 million live:
  • Walgreen: 473 stores, 52.1% Rx Market Share

  • CVS: 179 stores, 17.7% Rx Market Share
Source: The Retail Chain Pharmacy Yearkbook 2010 (Sorry, no link)

I would hate to be the Caremark sales rep trying to win a deal in the Midwest.

Or how about trying to provide access in Manhattan without Duane Reade?

Even more ominously, Walgreen has built a multi-channel footprint that crosses retail, mail, specialty, and home-health care dispensing formats. See the table in Walgreen’s PBM Bypass Strategy. Even if Caremark really doesn't want Walgreen, it will be very hard to live without them.

Finally, there is a more subtle risk for CVS Caremark’s own profitability. Payers expect lower costs from a narrower network. Will CVS Caremark end up giving away more than they save?

I hope the execs at these companies see the big picture and get things resolved quickly.


  1. Your title is hilarious! I love this: "PR Agency from Hell" LOL

    I agree with you. CVS's knee jerk reaction is not going to fly. In fact, I doubt those 179 stores nor their call center is equipped to handle the hoards of customers who are going to complain.

  2. AnonymousJune 10, 2010


    great post ! in the words of Rodney King, "..can we all get along?" ;)

    on to more serious matters though ....

    i used to love playing rock'em-sock'em robots!
    although invariably either blue or red robot dude's spring would become spent and the slightest jolt would send his skull to the sky....ahhh the simpler times !


  3. Adam, excellent research. I don't bother reading the (entire) press releases on CVS/Walgreens - I come to your blog to get the "between the lines" story. Is that a bad thing? (LOL) Well- it won't suprise you when I say: THIS IS AN OPPORTUNITY FOR THE INDEPENDENT PHARMACY OWNER!! Yep. Stuff your patient's bags with a short overview note about this situation and write how an independent pharmacy won't allow such corporate bickering to stiffle the pharmacy care of its patients. Describe how the BACK-OFFICE PBM/ STOCK price of the business of pharmacy should not over-shadow the most important aspect - the "care" in healthcare-pharmacy. It may seem "hokie" but the message will play well with 90% of customers out there who just want better customer service, personalized attention, consultative medication management - and a local hometown feel to their health-providers. JUMP ON THIS!! Walgreens and CVS can fight all they want - I hope the war rages for years!! In the mean time - I will be helping Local Community Indpendent's approach local employers and take back pharmacy business to the local pharmacy with a TRANSLUCENT PBM that's simple and less expensive.

  4. AnonymousJune 10, 2010

    If I was CVS and had skirted an SEC disapproval of the acquisition of a huge PBM by a very narrow margin, would I really want to prove that said acquisition really is anti-competitive in the industry? How's the old saying go? Pigs get fat, hogs get slaughtered?

  5. AnonymousJune 10, 2010


    The drug store wars have been escalating for a long time, what is at stake is cost(Disease) and the health outcome of the person for the Insurance provider of the assumed risk.
    Recidivism of Hospital readmission, surgery, as well as slowing the progression of the disease is why this battle is taking place.
    CVS/Caremark and PMB's controls information that pharmacies could use in drug selection, negotiation of prices,Trends in MD Rx selection, Inventory on and on.
    The optimal use of this data can reduce overall longevity cost's of the disease.
    The future of Pharmacy drug selection is beginning to have a much better understanding of medication selection and the patient's response to the chosen therapeutic regiment.
    What would make a PBM want to buy a specialty pharmacy? Profits!!

    But you Know this already..

  6. AnonymousJune 11, 2010

    As an independent pharmacy owner with Walgreens and CVS as competition, this is all good. Public perceptions of these 2 giants squabbling is great for my business. But imagine what my reimbursement is if Walgreens thinks they don't get pain enough. But in my experience the worst pbm to deal with is Express Scripts, they pay 2 weeks slower than anyone else, and have the lowest mac prices. They will be the next target, and they will be forced to increase reimbursement or have inadequate network coverage. I beg to differ with analysts who think that Express may be a beneficiary, and poach billions of dollars in pbm contracts. We are just seeing the tip of the iceberg here.

  7. AnonymousJune 11, 2010

    This is just the typical "press-release negotiation" tactics. Over the years, all the times you're see CVS & Walgreens independently do this, how many times do they end up pulling out of the network in question? I can't think of one. Whether they like it out not, it's in both of their bets interests to hammer out a deal. The losers in the end? All the independents & small chains who though they were going to get more business.

  8. AnonymousJune 13, 2010

    I wonder if Todd's Translucent PBM will ensure that information is "diffuse". I can hear the marking now: "Unlike those other guys, we are semi-transparent with information" we will show you part of the truth-- because we are translucent!"

  9. Anonymous, Regarding Translucent PBM. The "Transparent" domain was taken. (LOL) Had to settle for translucent. All information will be exposed within the program. This model is to ensure that the local independent pharmacy be the preferred provider of pharmacy services in the community. The World of "PBM" (Pharmacy Benefit Management) has been taken hostage along with prescription programs and services. CVC/Caremark, Medco, Express Scripts - it's all about their stock shares. Translucent Pharmacy Benefits is dedicated to better patient care and medication outcomes by involving the Independent Community Pharmacy in healthcare. The local pharmacist - who has accountability to their community, is our preferred service provider.