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:
- CVS Caremark Announces Plan To Remove Walgreens From PBM Pharmacy Network and Transition Pharmacy Care To Participating Providers
- Walgreens Statement Regarding CVS Caremark's Recent Announcement
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.
A STRATEGIC BLUNDER?
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
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.
