CVS CVS Health Corporation

By Paul Ziobro 

CVS Health Inc. is getting a taste of its own medicine.

The biggest U.S. drugstore chain warned that it stands to lose 40 million prescriptions next year as deals signed by rival Walgreens Boots Alliance Inc. with other participants in the drug supply chain shut out CVS pharmacies.

The company, which had pioneered a business model that put drug insurance and nearly 9,700 pharmacies under the same roof, lowered its profit outlook for the rest of this year and next. Shares tumbled 13% in early Tuesday trading.

Chief Executive Larry Merlo said two recent partnerships that Walgreens struck with health plans that entirely excluded CVS drugstores from their networks were the main reason for the expected decline in prescriptions. CVS filled 1.03 billion prescriptions in 2015, the last full year available, up from 722 million five years earlier.

"We have always said that our last scripts are our most profitable," Mr. Merlo said on a conference call with analysts. "Unfortunately, this means that the scripts we lose will tend to be our most profitable scripts."

Pharmacy-benefits managers, which include companies like Express Scripts Holding Co. and CVS Health's Caremark, operate as middlemen between insurance companies, corporations that pay for health coverage, drugmakers, and pharmacies. They help process claims for prescriptions drugs while also negotiating with drugmakers and insurance companies over the price of medications.

By owning Caremark as well as thousands of drugstores, CVS Health has been able to closely align both businesses to encourage patients to fill their prescriptions somewhere within the CVS empire. For instance, under its Maintenance Choice program, patients can get 90-day prescriptions filled either through the pharmacy-benefit program's mail-order business or at CVS stores at the same lower price.

But that leaves an opening for Walgreens to partner with other pharmacy-benefit managers. "CVS can't have that same relations with other competing PBMs," said Adam Fein of Philadelphia-based Pembroke Consulting, who tracks drug distribution. "Walgreens is using CVS Health's strengths against it."

Under CEO Stefano Pessina, Walgreens Boots has been aggressively pursuing deals that make its pharmacies part of preferred networks where patients can fill their prescriptions at a discount. It has had a number of wins, too, including becoming the preferred pharmacy for United Healthcare Inc.'s OptumRx and for Prime Therapeutics, which manages drug benefits for 14 Blue Cross and Blue Shield health plans.

Last month, Walgreens signed a deal to become the preferred network for Tricare, the Defense Department's health-care network, supplanting CVS Health. It has also struck a deal to acquire the No. 3 U.S. chain, Rite Aid Corp., though the transaction awaits regulatory approval. Walgreens filled 929 million prescriptions in the fiscal year ended Aug. 31.

"Walgreens is trying to be the best friend of every PBM that's not named Caremark," said Mr. Fein. Walgreens is courting prescriptions because it wants to drive more traffic to its stores, so it can sell shoppers beauty and other products. CVS Health has been less willing to chase foot traffic with discounts, and even encourages customers to fill prescriptions by mail.

Mr. Merlo said Walgreens' deals with Prime and Tricare cut out CVS pharmacies entirely, and that weighs on profitability because of the fixed costs tied to running the locations. It also means fewer people coming into stores and spending money on snacks, household items and other sundries.

But Mr. Merlo defended the CVS Health model compared with the partnerships that Walgreens has made. "While they may get part of the way there, we don't believe they can extract the full value that we do through our truly integrated model," he said.

In 4 p.m. trading Tuesday, CVS Health shares were down 12% at $73.53. The shares had already fallen nearly 15% this year, as investors fretted over pushback to rising drug prices and unease over the presidential election. Shares of Walgreens Boots fell 4% on Tuesday.

CVS Health lowered its financial targets. For 2017 it now expects adjusted earnings per share of $5.77 to $5.93. Analysts polled by Thomson Reuters had expected earnings per share of $6.52.

The Woonsocket, R.I.-based giant has increasingly relied on its Caremark division for growth. In the latest quarter, CVS Health had a profit of $1.54 billion, or $1.43 a share, up from $1.25 billion, or $1.11 a share, a year earlier.

Revenue increased 15% to $44.62 billion, Revenue in the pharmacy services segment, which includes Caremark, rose 19.2% to $30.4 billion.

Sales at existing pharmacy locations rose 2.3%, with a 3.4% increase in prescription sales offset by a 1% decline in the front-end of the business.

Austen Hufford contributed to this article

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

November 09, 2016 02:48 ET (07:48 GMT)

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