Drugstore War: CVS vs. Walgreen - TheStreet

Drugstore War: CVS vs. Walgreen

CVS is kicking Walgreen out of its pharmacy benefits management business.
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(Drugstore article updated with commentary from Walgreen and analyst analysis.)

NEW YORK (

TheStreet

-- The drugstore war is on, as

CVS Caremark

(CVS) - Get Report

has retaliated against

Walgreen

(WAG)

, kicking it out of its pharmacy benefits management business.

CVS said on Wednesday that it will cut off Walgreen in 30 days and end its participation in its Medicare Part D retail pharmacy network on Jan. 1.

"CVS Caremark's move plainly contradicts its own statement on June 7 that their mission is to provide broad access and choice for consumers," Walgreen Executive Vice President Kermit R. Crawford, said in a statement. "Their patent disregard for patient choice and broad access reflected in today's decision reinforces our conviction that it would not have been in the best interests of our patients, pharmacists or shareholders to grow our business with CVS Caremark."

The move comes after Walgreen announced earlier in the week that it will no longer handle prescriptions managed by Caremark because of disagreements over CVS's business practices and drug pricing. "Unfortunately, as a result of CVS Caremark's pharmacy benefit management practices toward Walgreens, it no longer makes good business sense for Walgreens to be part of their network for new and renewed plans," Walgreen CEO Greg Wasson said in a statement on Monday.

This battle is driving shares of the two lower, with CVS falling 0.7% to $30.93, while Walgreen is dropping 1% to $30.32 in early trading. But

Rite Aid

(RAD) - Get Report

, is surging 6.1% to $1.14.

Walgreen currently receives 7%, or about $4.5 billion, of its annual revenue from Caremark plans.

Walgreen said it intended to honor current contracts, but wouldn't participate in new or renewed plans. It made note that in about three years it may no longer have any business dealings with Caremark.

But it looks like CVS would rather Walgreen end the deal on its terms.

As a result of the dispute, Moody's Investor Services lowered its rating on Walgreen to negative from stable, but said it does not affect its outlook for CVS.

Still, IBISWorld analyst Sophia Snyder said this move could hurt sales at both players and disrupt service to customers. For Walgreen "this is particularly true because drugstores have relatively fixed costs and customers sent into pharmacies through PBMs often purchase high-margin, front-end sales during visits," Snyder said. "On the other hand, CVS Caremark is in an unfavorable position. Losing Walgreen from its network could result in major disruptions to Caremark's PBM clients, and the company has been struggling to sell its PBM offering."

This could give a boost to PBM competitors like

MedcoHealth Solutions

(MHS)

and

Express Scripts

>

(ESRX)

, Snyder said. These companies "offer broad networks without the controversy or uncertainty."

POLL: WILL CVS BE HURT AS WALGREEN CUTS TIES?

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-- Reported by Jeanine Poggi in New York.

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