Walgreen, CVS Caremark end spat

By Michael Oneal
Posted June 18, 2010 at 11:52 a.m.

It turns out Walgreen Co. and CVS Caremark Corp. need each other after all.

After months of contract negotiations, punctuated by a two-week public brawl, the two drug store giants announced Friday that they have settled a dispute that threatened to prevent thousands of people from getting their prescriptions filled at Walgreens stores.

At issue: How Caremark, one of the nation’s biggest prescription plan operators, prices discounts for prescriptions filled at Walgreens pharmacies, which often compete fiercely with CVS stores on nearby street corners around the United States.

The terms of the settlement weren’t disclosed. But the truce will avoid a major disruptions for both Walgreens customers and the business operations of both companies.

The relief was evident in two companies’ stock prices. Shares of Walgreen and CVS Caremark jumped more than 3 percent each in morning trading after tumbling more than 5 percent since the public battle began.

What the dispute made clear is that Walgreen and CVS Caremark depend on each other. Walgreen has 7,522 outlets and is the largest U.S. drugstore chain operator, slightly ahead of CVS. Caremark, which negotiates prescription benefit plans with employers nationwide, covers one out of every 10 Walgreens pharmacy customer, the company said, generating around $4.5 billion in revenue.

That relationship, however, has been complicated and strained since CVS bought Caremark three years ago and boiled over on June 7, when Walgreen announced that it was pulling out of the Caremark prescription network. It claimed Caremark wasn’t paying enough for prescriptions filled at Walgreens and had set up policies that encouraged plan participants to take their business to CVS.

Walgreens said the pullback would be a gradual one, but two days later, Caremark said it would cut off Walgreen in a month claiming the Illinois company was demanding discounts that were too steep.

Analysts said CVS Caremark ran the risk of losing contracts to health plan sponsors who did not want to join a network that left out the nation’s largest chain of drugstores. The dispute went public while Caremark was trying to sign clients to contracts that go into effect next year.

In a June 7 release, Kermit Crawford, Walgreen’s executive vice president of pharmacy, said that “In the three years since the CVS-Caremark merger, it has become increasingly clear to us that Caremark’s approach to Walgreens as a community pharmacy within CVS Caremark’s retail network has fundamentally changed, and we are no longer viewed as a valued community pharmacy within its PBM network.”

On Friday,  both sides were playing nice.

“We are very pleased with the outcome of this mutual, multi-year agreement that meets our business objectives,” said Walgreens’ Crawford. “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.”

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