Walgreen-CVS Caremark Spat a Lose-Lose Proposition
Walgreen’s (WAG) decision not to fill new prescriptions from CVS Caremark’s (CVS) pharmacy benefit management unit is a losing proposition for both companies. Analysts quoted on Alacra Pulse agree the move hurts Walgreen and CVS, but differ on which will be hit hardest, unless the rival drug chains resolve their differences over reimbursement rates and policies that Walgreen claims steers some patients to CVS’s own pharmacies.
Helen Wolk of Sanford C. Bernstein believes Walgreens’ actions represent “a negotiating tactic, albeit a very aggressive one, to garner increased reimbursement from Caremark.” Reimbursement from Caremark represents 7 percent of Walgreens’ total revenue.
Morgan Stanley cut its rating on CVS to “Equalweight” from “Overweight,” and suspended its $42 price target on the stock, which had closed at $31.04 after dropping more than 8% on Monday.
JPMorgan analyst Lisa Gill is less concerned about the impact on CVS: “Even without Walgreens within their network, CVS has a broad footprint of pharmacies, and members would have enough other alternatives to fill their prescriptions.”
George Hill of Leerink Swann sees Walgreen’s decision as more of a “near-term hiccup for CVS Caremark.” He expects rival pharmacy benefit managers Express Scripts (ESRX) and MedcoHealth (MHS) to benefit.
As reported previously, prescriptions dispensed in the US were up up 5.7% in the first quaerter, led by MedcoHealth and Walgreen. According to Fitch Ratings, between CVS Caremark and Walgreen, total prescriptions dispensed increased roughly 3.4%. More than 80% of the growth, however, was attributable to WAG as total adjusted prescriptions dispensed grew more than 6%, while CVS’ volume grew 1% over the same period.
SunTrust Robinson Humphrey analyst David Magee thinks there is a good chance CVS and Walgreen will renegotiate their reimbursement rates to give Walgreen a better deal.
Thomas Weisel Partners analyst Steven Halper believes that the withdrawal of Walgreens from the Caremark program will have a greater effect on the CVS bottom line. He said it could could keep as much as 25% of plan providers from renewing with Caremark — amounting to a decline of $0.36 per share in earnings over the next three years.
Morningstar’s Matthew Coffina sees spinning off Caremark as a potential solution, undoing the 2007 merger. “We are maintaining all fair value estimates at this time. However, depending on how this stand-off plays out, we may be inclined to lower CVS Caremark’s and Walgreen’s fair value estimates and increase those of Medco and Express Scripts.”
Sources: Chicago Tribune, Reuters, USA Today, Dividend.com, Minyanville, Morningstar.com.
This post was based on an Advanced Search of Alacra Pulse fro the companies mentioned.
(Disclosure: Long CVS)
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August 30th, 2010 at 2:42 pm
[...] As reported yesterday, analysts quoted on Alacra Pulse agree the move hurts both companies, but differ on which will be hit hardest. Now, UBS analyst Neil Currie says “CVS could lose some contracts, but Walgreen has more to lose from this spat potentially.” He thinks WAG could lose $5m a year. [...]