Drugstore War: CVS, Walgreen Both Losers?

CVS and Walgreen went head to head this week over PBM business, and both companies may come out losers.
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NEW YORK (

TheStreet

) -- Drugstore rivalries heated up this week as the leaders in the sector --

CVS Caremark

(CVS) - Get Report

and

Walgreen

(WAG)

-- battled it out over their pharmacy benefits-management businesses.

On Monday, 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.

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.

After the news first emerged,

TheStreet

polled readers, asking if they thought CVS would be hurt by Walgreen's decision. The majority, 59.4%, said yes, while 40.6% didn't think it would have an effect on CVS.

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.

Walgreen currently receives 7%, or about $4.5 billion, of its annual revenue from Caremark plans. Investors fear the severed ties will put pressure on Walgreen.

As a result of the dispute, Moody's Investor Services lowered its rating on Walgreen to negative from stable, but said its outlook for CVS wasn't affected by the spat.

Advantage CVS.

But IBISWorld analyst Sophia Snyder said CVS's retaliatory move could hurt sales at both players and disrupt service to customers. "This is particularly true

of Walgreen because drugstores have relatively fixed costs, and customers sent into pharmacies through PBMs often purchase high-margin, front-end sales during visits," she 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."

Thomas Weisel downgraded Walgreen on Friday to market weight from overweight, citing concerns of future sales growth coupled with losing CVS business. Analyst Steven Halper also slashed his price target to $30 from $45.

Since the battle ensued, shares of Walgreen have fallen 4.4% to close on Friday at $29.48, while CVS is off 5.6% to end the week at $33.79.

-Reported by Jeanine Poggi in New York.

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