CVS Caremark, Walgreen Reach Agreement on Drug Plans

Walgreen Co. and CVS Caremark Corp., the largest U.S. drugstore chains, agreed to allow pharmacy- benefits customers to keep filling prescriptions at Walgreen’s locations, ending an 11-day dispute. Both stocks rose.

The companies aren’t disclosing the financial terms of the deal, they said in a joint statement today. Walgreen said June 7 that it would stop taking part in new prescription-drug plans managed by CVS Caremark. Two days later, CVS Caremark announced plans to cut Walgreen out of its retail pharmacy network.

The accord means CVS Caremark, based in Woonsocket, Rhode Island, will deflect complaints from customers of its pharmacy- benefits management, or PBM, living in areas mainly served by Walgreen, the biggest drugstore chain. Walgreen will avoid losing almost $5 billion in annual sales.

“Both sides had good reasons to resolve this situation quickly,” said Adam Fein, president of Philadelphia-based Pembroke Consulting Inc., a health-care distribution consulting firm. “CVS Caremark needed to minimize damage to its PBM business, while Walgreen faced an enormous revenue hit from the loss of Caremark. Everyone also recognized the enormous disruption for patients caused by a permanent split.”

Photographer: Daniel Barry/Bloomberg

A person enters a CVS store and pharmacy in Newark, New Jersey. Close

A person enters a CVS store and pharmacy in Newark, New Jersey.

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Photographer: Daniel Barry/Bloomberg

A person enters a CVS store and pharmacy in Newark, New Jersey.

Walgreen, based in Deerfield, Illinois, rose 82 cents, or 2.8 percent, to $30.09 at 4:01 p.m. in New York Stock Exchange composite trading. CVS Caremark advanced 59 cents, or 1.9 percent, to $32.43.

On June 9, CVS Caremark had said it would cut off Walgreen in 30 days. The companies were wrangling over the fees CVS Caremark pays to reimburse stores in its pharmacy network, with Walgreen saying the unpredictability of repayment rates has hindered financial planning. CVS Caremark responded that Walgreen’s rates are comparable to those of other large chains.

Walgreen Pleased

“We are very pleased with the outcome of this mutual, multi-year agreement that meets our business objectives,” Kermit Crawford, Walgreen’s executive vice president of pharmacy, said in the statement. “The agreement makes good business sense.”

The deal will help enhance network stability and lessen disruption to patients, Per Lofberg, president of CVS Caremark’s pharmacy benefit management business, said in the statement.

The Caremark unit negotiates drug prices with manufacturers and drugstores for company and government clients. Participants can buy drugs through the mail or a network of stores that have agreed to CVS Caremark’s prices, including Walgreen’s locations.

Walgreen had cited CVS Caremark’s Maintenance Choice program as one of the reasons for its initial withdrawal from the company’s retail pharmacy network, saying it limits patient choice. The program makes its users fill prescriptions for long- term illnesses through CVS Caremark’s outlets or through its mail-order program.

Investigation

“As long as the benefit design is not changing, that’s a win for CVS,” said Thomas Gallucci, an analyst at New York- based Lazard Capital Markets. “But the speed at which this got done suggests that both sides realized they had something to lose.”

Ties between the Caremark unit and CVS’s retail stores, brought together in a 2007 merger, are under investigation by the Federal Trade Commission and at least 24 U.S. states.

CVS Caremark rejects the idea that its operation of programs like Maintenance Choice is violating antitrust law, it said in a statement this month.

The resolution may relieve Manhattan residents with CVS Caremark drug plans because they will still be able to go through stores owned by Walgreen. The company agreed to buy Duane Reade Holdings Inc. this year to become the largest drugstore chain in the five boroughs. There are 13 Walgreen stores and 151 Duane Reade locations in Manhattan, compared with 35 for CVS Caremark.

To contact the reporter on this story: Carol Wolf in Washington at cwolf@bloomberg.net; Alex Sherman in New York at asherman6@bloomberg.net

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