* 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
By Phil Wahba and Nivedita Bhattacharjee
NEW YORK, June 9 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.
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