CVS Caremark v Walgreens – Who’s going to blink?

This morning’s announcement by CVS Caremark that they are terminating their contracts with Walgreens in 30 days ups the ante in the ongoing battle between the two huge pharmacy firms. The decision came after Walgreen’s earlier announcement that it was not going to renew its contracts with the big PBM/retailer due to ‘irreconcilable differences’.
After Walgreen’s shot across CVS Caremark’s bow earlier this week, Caremark’s stock took a hit, dropping to its 52-week low after an 8% decline. Walgreens’ valuation has also suffered, altho less than CVS/Caremark’s.
There are a lot of moving parts here, which we’ll try to briefly summarize.
First, retail pharmacy chains have been suspicious of CVS Caremark ever since the two companies merged several years ago, concerned that the PBM (Caremark) would favor the retail chain (CVS) over other retail chains, such as Walgreens, Rite-Aid, and independents and food/drug combos including WalMart. Walgreens isn’t the only retailer complaining.
Second, we’re in the bidding and contracting phase for next year’s PBM contracts, and the loss of Walgreens’ 7500 stores will throw a rather large X factor into big buyers’ decision matrices. How that plays out has certainly been thought through at both companies; what actually happens will determine who ends up on top.
Third, Caremark will also terminate Walgreens from at least one of their Part D offerings. The fallout from this will be much less clear-cut; seniors may well stick with the retail store where they’re comfortable and feel taken care of, and move to a competing PBM that includes Walgreens.
Fourth, staff are likely dancing in the halls at Caremark competitors Express and Medco; both companies have seen a slight uptick in their stock prices, and the timing couldn’t be better for their sales efforts.
What’s going to happen?
Some think Walgreens is going to blink. Caremark’s business accounts for 7% of Walgreens’ revenue, and that doesn’t include the additional sales from Caremark members who pick up essentials along with their scripts. That’s a lot of revenue. Walgreens has a bit of a history of backing down; we’ll see.
Others are of the mind that Walgreens wouldn’t have pushed it this far, this publicly, if they weren’t fully prepared to end the relationship. Walgreens has certainly calculated the margins on this revenue, estimated how much they’ll keep, and decided they are better off losing lower margin business today, and certainly have assessed Caremark’s future strategy and decided things were only going to get worse. Better to cut their losses now and move on than to slowly bleed.
If the latter is indeed the outcome, Walgreens will certainly have to push retail and one-to-one marketing much harder. They will have to convince consumers that they are better served by Walgreens than any other pharmacy. That will take a significant investment on the marketing and promotion side over and above what’s been spent historically.
UPDATE – moments ago Walgreens released the following – it is increasingly clear that if there’s any blinking to be done, it isn’t going to be on the part of the pharmacy chain.
“We are disappointed but not surprised that CVS Caremark has taken this action. In making our decision not to participate in any new and renewed plans by CVS Caremark, we sought to minimize any disruption to existing relationships between pharmacists and patients. CVS Caremark’s move plainly contradicts its own statement on June 7 that their mission is to provide broad access and choice for consumers. Their patent disregard for patient choice and broad access reflected in today’s decision reinforces our conviction that it would not have been in the best interests of our patients, pharmacists or shareholders to grow our business with CVS Caremark. Regardless of CVS Caremark’s decision, we are confident of our ability to continue to grow our business as a provider in hundreds of other pharmacy benefit networks and as a direct provider to employers.”
Interestingly, no one thinks Caremark is likely to back down.
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