Drugstore War Reaches Resolution - TheStreet

Drugstore War Reaches Resolution

CVS and Walgreen have come to an agreement over its PBM business.
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CVS Caremark

(CVS) - Get Report




have decided to play nice.

The drugstores announced on Friday that they have reached an agreement involving Walgreen's participation in CVS' pharmacy benefits management business.

Under the new agreement, Walgreen will continue to participate in CVS' Caremark business for existing, new and renewed plans. The financial terms of the deal were not disclosed.

Over the past week, Walgreen and CVS have been butting heads over the Caremark program. It all started when Walgreen announced that it was ending its deal with CVS's PBM unit, citing 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 at the time.

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

But later in the week, CVS counter-attacked, saying it had decided to kick Walgreen out of its PBM business. On Wednesday, CVS said it would cut off Walgreen in 30 days and end its participation in its Medicare Part D retail pharmacy network on Jan. 1.

IBISWorld analyst Sophie Snyder believes Walgreen most likely was the initiator of the agreement since it had more to lose. Walgreen currently receives 7%, or about $4.5 billion, of its annual revenue from Caremark plans.

Walgreen's prescription business is skewed toward the less profitable acute-prescription segment, Snyder said. The situation has raised a red flag, she added, leaving investors to wonder if something is fundamentally wrong with Walgreen's pharmaceutical business.

In additon, Snyder said, the whole debacle could be a wake-up call for CVS, pushing the company to fill in geographical gaps in its network. Currently, CVS is limited in its coverage of New York and Chicago, as well as the Pacific Northwest.

Snyder said there could be an opportunity for CVS to purchase some-stores from struggling

Rite Aid

(RAD) - Get Report

in the Pacific Northwest and Rocky Mountain regions.

"This situation has made it clear that having a partnership with Walgreen, the largest drugstore, is important to the success of CVS's PBM business," Snyder said.

Shares of Walgreen are gaining 3.5% to $30.29 in Friday afternoon trading, while CVS is up 3.1% $32.81.

-- Reported by Jeanine Poggi in New York.

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