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Walgreens, CVS Caremark settle PBM dispute
June 18th, 2010
DEERFIELD, Ill. and WOONSOCKET, R.I. – Ending what had been shaping up to be a standoff, Walgreen Co. and CVS Caremark Corp. have reached an agreement in which Walgreens will continue as a provider in the Caremark pharmacy benefit management retail network for current, new and renewal plans.
The two drug store chain rivals announced the settlement Friday morning. Financial terms of the new PBM contract weren't disclosed.
"We are very pleased with the outcome of this mutual, multiyear agreement that meets our business objectives," Kermit Crawford, executive vice president of pharmacy at Walgreens, said in a statement. "The agreement makes good business sense, provides the framework we need to operate our business going forward, and assures choice and convenience for the many consumers who look to us for quality pharmacy care. The agreement is good for our patients, pharmacists and shareholders, and will allow us to continue to meet the needs of our customers across the country through the CVS Caremark network."
Per Lofberg, president of CVS Caremark's PBM business, commented, "We are pleased to have reached a mutually agreeable solution together with Walgreens that is consistent with our top priority to provide convenient access to affordable high-quality pharmacy health care. This new contract enables Walgreens to continue participating in CVS Caremark's PBM national pharmacy network, provides enhanced network stability, eliminates any current or long-term disruption for our clients or their members, and allows us to continue to fulfill our obligation to deliver cost-effective pharmacy benefits for our clients."
Industry analysts had said a resolution to the dispute was likely, given the potential impact to Walgreens' retail pharmacy business and to CVS Caremark's PBM business.
But a settlement appeared to come sooner than expected, after an escalation in the dispute had led analysts to think that the two pharmacy competitors wouldn't resolve the matter until later this summer once they sized up their options.
As of late Friday morning trading, CVS Caremark shares were up $1.04 to $32.88, and Walgreens shares had climbed $1.12 to $30.39.
"This announcement is a clear positive for both companies, as it eliminates the lose-lose scenario that would have developed in about three weeks, when CVS Caremark would have cut Walgreens out of all existing plans," William Blair & Co. analyst Mark Miller stated Friday in a research note on the settlement.
The spat began June 7, when Walgreens announced that it no longer planned to participate in any new and renewed prescription drug plans awarded to the CVS Caremark PBM business. Explaining the move, Walgreens said it was "no longer in the best interests of its customers, pharmacists and shareholders to grow its future business with CVS Caremark." The Deerfield, Ill.-based drug store chain — the largest pharmacy provider in the PBM's network — cited issues with CVS Caremark regarding its Maintenance Choice program, transfers of prescription plans to other pharmacies and reimbursement rates.
Shortly after the announcement, CVS Caremark stated that it was "surprised and disappointed" by Walgreens' action. Two days later, the Woonsocket, R.I.-based pharmacy company announced that it planned to cut Walgreens from its PBM retail network in 30 days. CVS Caremark said Walgreens' action violated the terms of its existing agreements and claimed the move was just attempt to get increased pharmacy reimbursement rates.
CVS Caremark said Friday that with the continuing participation of Walgreens, the Caremark retail pharmacy network will have more than 64,000 participating pharmacies, including neighborhood independent pharmacies, chain pharmacies, and those located in supermarkets and other major retailers.
Walgreens has over 7,500 drug stores in all 50 states plus Washington, D.C., and Puerto Rico. The chain has reported that it operates pharmacies within 5 miles of nearly eight in 10 Americans.
*Editor's Note: Article updated June 18 with analyst comment.