UPDATE 5-CVS hits back at Walgreen, removes it from network

Wed Jun 9, 2010 4:17pm EDT

* CVS Caremark removing Walgreen from PBM in 30 days

* CVS removing Walgreen from Medicare plan on Jan. 1

* Walgreen shares down 2.6 pct, CVS down 1.5 pct (Updates shares)

By Phil Wahba and Nivedita Bhattacharjee

NEW YORK, June 9 (Reuters) - CVS Caremark Corp (CVS.N) will remove Walgreen Co (WAG.N) from its pharmacy benefits management network in retaliation for Walgreen's decision to stop filling prescriptions for new CVS Caremark business.

The two drugstore rivals' shares fell on Wednesday as both stand to lose in the dispute. Shares of Walgreen finished the day down 2.6 percent, while CVS's shares slipped 1.5 percent.

Walgreen said on Monday it would not be a provider for any new or renewed drug plans handled by CVS's PBM network because it favored CVS pharmacies, accusing CVS of diverting more patients to its own drugstores and reimbursement rates that did not reflect the market [ID:nN07188119] .

On Wednesday, CVS upped the ante by saying it would end Walgreen's participation in its retail pharmacy networks in 30 days. It will also end Walgreen's participation in one of its Medicare retail pharmacy networks as of Jan. 1.

CVS Caremark's pharmacy benefits management (PBM) business administers prescription drug benefits for employers and health plans, as well as a large mail-order pharmacy.

Analysts doubted the two largest U.S. drugstore chains would disengage for good over the long term. Some see CVS rivals in the PBM sector, such as Medco Health Solutions Inc MHS.N and Express Scripts Inc (ESRX.O), picking up business while the Walgreen fight works itself out.

"I still think it's a negotiating tactic on both sides. CVS has upped the ante," said Gabelli & Co analyst Jeff Jonas.

CVS's PBM business lost $4.8 billion in contracts last year. The company has much at stake in this dispute, Gimme Credit's Director of Research Carol Levenson said in a note.

"Not only is Walgreen the nation's biggest pharmacy chain, but it also fills one out of every five prescriptions in the U.S.," she wrote.

Walgreen holds an 18 percent market share.

WALGREEN'S WOUNDS

The impact on Walgreen, which gets about 7 percent of its revenue from the CVS drug plan business, will be more immediate than it had initially anticipated. Walgreen's decision was to honor existing CVS drug plans until they are renewed, a process that could take up to three years in some cases.

"This public escalation with CVS/Caremark has shown clearly that Walgreen is feeling pinched by volume losses and reimbursement rate pressure," Jefferies analyst Scott Mushkin wrote in a note.

Mushkin sees the loss of revenue to Walgreen from prescriptions and regular merchandise shaving earnings by as much as 65 cents per share in its fiscal year 2011.

Credit rating agency Moody's cut its outlook for Walgreen to "negative", but said it was unrelated to the dispute.

The spat between the two companies could be an opening for rivals as companies look to renew their contracts. Medco shares rose 0.4 percent and Express Scripts slipped 0.1 percent.

"Many in the industry, such as Rite Aid (RAD.N), the supermarkets and others, likely would be interested in Walgreen's Caremark volume and CVS/Caremark may find it has other options," Mushkin added.

CVS bought Caremark for $27 billion in 2007 to expand its PBM operations. It said that Walgreen accounted for about 7,000 of the 64,000 pharmacies that participate in its PBM business.

"Walgreens' announcement was nothing more than a transparent attempt to try to raise the pharmacy reimbursement rates it receives from CVS Caremark," CVS PBM President Per Lofberg said in a statement.

He accused Walgreen of using such tactics in the past against employers and health insurers.

"We believe this approach is totally contrary to the needs of our clients who are all struggling to keep pharmacy health care affordable," he said.

Walgreen's Executive Vice President of Pharmacy Kermit Crawford said in response that CVS's actions showed a "patent disregard for patient choice and broad access" when it comes to filling prescriptions by canceling all participation outright.

CVS is the subject of a Federal Trade Commission investigation into its business practices. The FTC has been probing allegations the merger gave CVS incentives to convince patients to get prescriptions filled at CVS pharmacies.

"There have been many complaints about it (the merger) in its aftermath," Richard Feinstein, director of the FTC's Bureau of Competition, said on Wednesday at a breakfast to discuss antitrust matters. He declined to discuss the status of the investigation, which began in August 2009. (Additional reporting by Diane Bartz in Washington; editing by Michele Gershberg, Maureen Bavdek, Andre Grenon and Bernard Orr)

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