Walgreens and CVS reach agreement

June 23, 2010

Walgreens and CVS Caremark have signed a multi-year contract to keep Walgreens in the Caremark pharmacy network, resolving recent issues between the drugstore chains, according to The Wall Street Journal.

Walgreens and CVS Caremark have signed a multi-year contract to keep Walgreens in the Caremark pharmacy network, resolving recent issues between the drugstore chains, according to The Wall Street Journal.

No financial terms of the new deal were disclosed, but Kermit Crawford, Walgreens' executive vice president of pharmacy, said that the agreement "makes good business sense, providing the framework we need to operate our business."

Shares of Walgreens and CVS Caremark both rose about 5% in early trading following news of the agreement. The deal has "averted potential customer disruption," analyst Mark Wiltamuth at Morgan Stanley said, and "underscores that pharmacy network access does matter to customers."

This resolution comes after Walgreens announced that it would no longer participate as a provider in any new and renewed prescription-drug plans awarded after June 7 to CVS Caremark’s pharmacy benefit manager (PBM). Two days after that announcement, CVS Caremark responded that it would no longer cover prescriptions filled by Walgreens.

Walgreens had concluded that it was no longer in the best interests of its customers, pharmacists, and shareholders to grow its future business with CVS Caremark, the company said in a statement.

In a letter to CVS Caremark, Walgreens said that “CVS’s promotion of prescription drug plan designs such as Maintenance Choice disrupts networks by requiring patients with chronic conditions in many plans to use CVS pharmacies or Caremark mail-service facilities for their prescriptions instead of Walgreens.” That limits patient choice and ends up separating patients from community pharmacists they know and trust, according to Walgreens.

In a statement, Woonsocket, R.I.-based CVS Caremark said that it was forced into the decision because Walgreens’ actions violated the terms of its existing agreements and it has failed to respond to efforts by CVS Caremark to continue business negotiations.

“Walgreens’ announcement was nothing more than a transparent attempt to try to raise the pharmacy reimbursement rates it receives from CVS Caremark,” said Per Lofberg, president of CVS Caremark’s PBM business. “We’ve seen Walgreens use this approach in the past, targeting employers, health insurers, government entities, and other plan sponsors. We believe this approach is totally contrary to the needs of our clients who are struggling to keep pharmacy healthcare affordable in today’s challenging environment.”

Despite the new agreement, Wiltamuth said, "neither stock will likely return fully to their pre-dispute levels."

He noted that the dispute revives the debate over CVS Caremark's business model, while Walgreen has admitted it's losing market share to Maintenance Choice and has been under margin pressure from PBMs.

CVS became one of the largest PBMs in the United States after it acquired Caremark for $27 billion in 2007.