CVS, Walgreen Reach Agreement - Analyst Blog

Recently, CVS Caremark (CVS) and Walgreens (WAG) reached an agreement under which Walgreens will participate in CVS’ pharmacy benefit management (PBM) plan. However, financial terms of the new contract were not disclosed.

Earlier this month, Walgreens, with more than 7,500 drugstores, had announced that it will not serve as a pharmacy provider for any new and renewed prescription drug plan awarded to CVS’ PBM segment. At the end of the March quarter, CVS had approximately 7000 retail drug stores.

The settlement of the issue is positive for both CVS and Walgreens as severance of ties would have hampered their revenue growth. Moreover, many patients who fill their prescriptions at Walgreens would have suffered.

This is all the more significant for CVS since it is likely to benefit in the long term from healthcare reform, which is likely to include more than 32 million people under the insurance bracket. Since PBM is aimed at lowering health care costs over the long term, increased coverage would benefit the company. 

The reform has eliminated the tax advantage enjoyed by employers related to Retiree Drug Subsidy (RDS) from 2013. This subsidy was let out so that it could act as an incentive for employers to keep offering drug coverage rather than shifting the retirees to Medicare Part D. Although changes are expected to appear gradually, CVS is well positioned to help its clients in determining the future roadmap. 

CVS Caremark’s retail growth is based on geographic expansion, while improving operations through efficient product and cost management initiatives. Expansion has been achieved through the construction of new stores and through acquisitions. The company’s strong balance sheet bodes well for acquisitions in addition to rewarding shareholders in the form of share repurchases and regular dividends.