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Analysts: High stakes called for swift resolution to PBM feud

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NEW YORK — The outcome of the Walgreens-CVS Caremark feud over prescription reimbursement rates was predicted by industry analysts, who said both companies had too much to lose from a protracted battle.

Immediately after the drug store giants began bickering over what Walgreens labelled as CVS Caremark’s unpredictable reimbursement rates, analysts nationwide said they expected the disagreement to be short lived and end with a negotiated settlement.

“We believe that reestablishment of working ties would be in the best interests of both companies, and our best guess is that Walgreens ultimately will remain in the networks for 2011,” William Blair & Co. analyst Mark Miller wrote in a research note just days after Walgreens said that starting next year it would not fill prescriptions for any new or renewed Caremark plans.

Helene Wolk, a senior analyst for Sanford Bernstein & Co., called Walgreens’ refusal to take on any new Caremark plans a hardball tactic designed to leverage increased reimbursements from the pharmacy benefit manager (PBM).

Describing Walgreens and CVS Caremark as “mutually dependent,” she predicted an agreement “before too long.”

Lisa Gill, an analyst at J.P. Morgan Co., said Walgreens saw the tactic as a way to disrupt the turnaround of Caremark — which lost $4.8 billion in contracts last year — by dampening its 2011 PBM contract-selling season.

“We would not rule out a resolution,” Gill wrote, noting that if CVS Caremark customers started telling the company that excluding Walgreens from its network would force them to consider taking their business to another PBM, it might be more willing to grant higher reimbursements.

“Alternatively,” she said, “if PBM customers are unfazed, Walgreens could be more willing to come back to the table, considering the dollar amount that they have at stake.”

At the same time, Gill pointed out that customers on CVS Caremark’s Maintenance Choice plan, who get optimum pricing at CVS stores or through mail order, “have already made the choice to restrict their pharmacy network.”

The dispute between the companies arose as PBMs vie for $40 billion in contracts during the selling season. Nearly a fifth of those contracts are expected to be CVS Caremark plan renewals.

Analysts noted that one factor that could spur a reconciliation was the possibility that a long battle between CVS Caremark and Walgreens could have resulted in rival PBMs Medco Health Solutions Inc. and Express Scripts Inc. poaching more than $1 billion worth of CVS Caremark contracts.


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