Analyst: CVS Caremark should buy pharmacy rival Walgreen

February 20th, 2012 at 12:13 pm by under Nesi's Notes, On the Main Site

Walgreen Co. and CVS Caremark are far and away the largest drugstore chains in the United States, with Rite Aid a distant third. Woonsocket-based CVS fills more prescriptions annually, while Walgreens has more stores (7,800 to CVS’s 7,300).

Most discussions of their rivalry focus on whether one should buy Pennsylvania-based Rite Aid to get a leg up on the other. But Morningstar analyst Matthew Coffina thinks the smartest move would be for the two leaders themselves to pair up – with CVS buying Walgreens to create “a retail powerhouse.”

“CVS Caremark and Walgreen would be better off together than apart,” Coffina wrote in a report issued Friday. They face the same “long-term threats” from pharmacy-benefit manager (PBM) consolidation, and by combining they’d gain bargaining power and make it harder for PBMs to exclude them from their networks, he said.

Coffina’s suggestion sounds outlandish at first blush. Regulators and law-enforcement agencies already keep a close eye on CVS – why would they allow the two leaders to merge into a single behemoth, especially since the National Community Pharmacists Association and consumer groups would likely howl in protest?

Coffina himself admits a merger is “a long shot,” but argues another development in the pharmacy sector – the pending merger of top PBMs Express Scripts and Medco, which compete with CVS and Walgreens - would make regulators look “hypocritical” if they block a CVS-Walgreens tie-up, though they might need to divest stores in certain markets.

CVS and Walgreens dispensed a combined 37% of all prescriptions sold in 2011, which “would be in line with or slightly below Express Scripts-Medco’s estimated PBM markets share,” Coffina said. There would still be more than 40,000 U.S. drugstores not owned by CVS-Walgreens after a merger, he said.

“If the relationship between payers and providers remains adversarial, the combined company would have much greater bargaining power against third-party pharmacy benefit managers,” Coffina wrote. “If enhanced cooperation between payers and providers turns out to be the best way to control costs, CVS Caremark-Walgreen could provide a highly differentiated offering to both PBM and retail clients.”

Coffina thinks CVS should take over Walgreens, and not the other way around, because CVS retail executives have shown “better execution” in recent years. Walgreen posted more revenue but less profit than CVS last year, and he sees “tremendous potential” in CVS Caremark’s integration of retail and mail-order pharmacies as well as its growing MinuteClinic franchise.

“However, CVS Caremark has much to prove,” Coffina wrote. The Caremark PBM unit “has massively underperformed its independent peers” since their 2007 merger, he said, and “CVS is still far from having the capacity to fill a majority of its PBM members’ prescriptions” at a physical drugstore.

Coffina isn’t a fan of either company buying Rite Aid, the usual subject of drugstore merger speculation. The No. 3 chain has $6 billion in debt and its stores have fallen into “significant disrepair.” Neither CVS nor Walgreens would likely be able to get much benefit out of Rite Aid without cannibalizing their existing stores, he said.

CVS spokeswoman Carolyn Castel declined to address Coffina’s suggestion. ”As a matter of policy, we don’t comment on rumors,” she told WPRI.com.

CVS had 61 locations in Rhode Island and 356 in Massachusetts as of Dec. 31, according to regulatory filings. Walgreens had 29 locations in Rhode Island and 180 in Massachusetts as of Aug. 31. Rite Aid had 46 locations in Rhode Island and 157 in Massachusetts as of last February.

• Related: Warren Buffett makes bigger bet on RI’s CVS with $290M stake (Feb. 16)

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12 Responses to “Analyst: CVS Caremark should buy pharmacy rival Walgreen”

  1. George says:

    I don’t think the feds would allow this merger.

  2. Beckus says:

    This is one of the most far-fetched ideas I’ve seen in a while and I’m surprised such rubbish would come from Morningstar. There is absolutely no possibility of such a combination getting FTC approval, and in fact the CVS-Medco merger is in serious trouble.

    I also question the thesis that an acquistion of Rite Aid would cannibalize sales at Walgreens or CVS, but somehow the combination of Walgreens and CVS would create synergies, since they have substantially more overlap with each other than with Rite Aid.

    Ultimately, in order for Walgreens and CVS to get FTC approval for a merger, they would have to divest of literally thousands of stores. The timeline for forced divestitures as the result of mergers tends to be relatively short. In most markets, it would be a fire sale, because the economic case for independent pharmacies has diminished.

    Finally, the suggestion that CVS has executed at retail more effectively than Walgreens is not supported by data. With CVS having combined with Caremark, the profitability that is attributed to the retail portion of the business versus PBM is arbitrary, because allocation formulas are used for certain parts of the business that are shared. It is one reason that the PBM numbers look so bad.

  3. Beckus says:

    Correction: I said CVS-Medco merger, but should have said ExpressScripts-Medco merger. Sorry for the mistake.

  4. I hope not, CVS is terrible.

    1. Ed says:

      I concur. I will do without than go into a CVS.

    2. Jay says:

      Walgreens and Rite Aid both suck worse!

  5. E Parra says:

    one account lost in over 110 years of service boo hoo, Walgreens technology, service, and availabitlity of services will bring customers back plus you dont write about the over 100 employers that are suing to esi to be let go of their contracts, so their workers can receive the care they deserve. in less than a rear you will be eating your words,when alot of contracts from employers are up .

  6. teddy says:

    I hate CVS. They are corrupt and they UNDER staff their stores–plus you have to wait like 3 hours, even days to fill a perscription there–and to pick them up can be a 20 minute wait in lines . RiteAid is incompenent, too.

    Walgreens is the best, knowledgable pharmicist, quick service, full staffed stores, great prices.

    Do us a favor CVS or anyone else, DO NOT BUY Walgreens.

    1. Jay says:

      Walgreens has NO item selection in their stores. It looks as if they were going out of business! And Rite Aid is just plain nasty!

      CVS rules!

  7. MacIntyre says:

    I do not like CVS at all. If this were to happed I believe Walgreens would be the ones who buy CVS.

    1. Jay says:

      No chance on that, CVS has better business practice! Walgreens sucks!

  8. Ronald J. Meyer says:

    I have in all my years NEVER received such poor service as I have in this last order.
    February 11th, 2012
    On-Line ordered refills for 12 Prescriptions, as I have many times.
    February the 12th, 2012
    Notified that the order was shipped United States Postal System
    February 18th, 2012
    Called Caremark Customer care,Was told that shipment was returned (Unknown Reason) and they were reshipping the order by United Parcel Service.
    February 22nd, 2012
    Was informed that after they checked the tracking number, UPS told them the Shipping Label was generated, however they did not receive the package.
    February 23rd, 2012 – February 28th Spoke to (6) Six different Caremark Customer Service and (1) Customer Service Escalation Representative, who all advised me they investigated by order and proceeded to tell me what I already knew. I told them I already know and have been advised many times what went wrong, I want to know when they were going to re-ship overnight my order?
    On one occasion I was asked if was out of any of my prescriptions in this Oder, if so they would ship me a ten day supply. ( If they could ship me a ten day supply, Why then could they not re-ship the entire original order?
    I am retired from AT&T, all my benefits are provided as part of my retirement benefits.
    February 29th, 2012.
    February I made a telephone call to the AT&T Benefits department, A representative from AT&T Benefits called Caremark, with me on the line, they again told him the same information that I has been told several times, They were informed we ere not interested what went wrong, only that the Original prescription of February be shipped. We were told they would see what could be done.
    February 30th, 2012 Spoke with Kim Wilburn of the Communications Workers of America, She is the CWA, Representative that deals with their members retired or active that are having concerns with AT&T Provided Benefits.
    I gave her all of the information she said she would get back to me.
    At this point in time three of my prescriptions have expired, others are soon to expire.
    Caremark CVS Mail Oder Pharmacy is not customer friendly.