CVS Caremark Corp. signage is displayed outside of a store in New York, U.S., on Tuesday, April 30, 2013. CVS Caremark Corp. is scheduled to release earnings data on May 1. Photographer: Victor J. Blue/Bloomberg via Getty Images
Photograph by Victor J. Blue — Bloomberg via Getty Images
By Phil Wahba
December 16, 2015

CVS Health (cvs) CEO Larry Merlo had some choice words on Wednesday for the new drug pricing and distribution deal struck by arch-rival Walgreens (wba) and drugmaker Valeant (vrx).

The pact, announced earlier this week, calls for Walgreens, the largest U.S. drugstore chain, to sell Valeant’s signature skin and eye drugs at a 10% discount under a 20-year agreement. A side agreement calls for Walgreens to sell at low generic-drug prices more than 30 other Valeant branded drugs that have been struggling with low-price competition.

Under the deal, Walgreens won’t take ownership of the Valeant drugs but instead hold them on consignment until delivery, a move that could marginalize pharmacy benefits managers, such as CVS’ Caremark unit. PBMs manage the pharmacy benefits of employer and health plans and use their clout to negotiate favorable prices with pharmaceutical companies and drugstores.

“This is another example of Valeant attempting to circumvent what PBMs do for payers,” Merlo told Wall Street analysts at the CVS investor day in New York. “These actions ultimately drive up costs for payers when you think about the use of prescription co-payment programs.”

A spokesman for Walgreens said the company had no comment, while representatives for Valeant did not return a request for comment. And Valeant CEO Michael Pearson declined to respond to an analyst’s question about the deal at its analyst day, also held Wednesday. Both companies said in a press release on Tuesday that the initiative would yield annual savings of $600 million into the healthcare system.

It’s easy to see why Merlo would take issue with anything hurting the PBM industry. CVS forecast Caremark revenue will hit $121 billion in 2016, more than double what it was in 2011, and it is growing far more quickly than CVS/pharmacy, the company’s retail division. Caremark is the second largest PBM after Express Scripts (esrx).

Merlo pointed to the fact that the Valeant/Walgreens pact excludes government insurance programs, and questioned the willingness of employer and health plans to pay higher reimbursements to cover the shortfall.

In any event, there is little love lost between CVS and Valeant: Merlo said 90% of the drugmaker’s programs are either excluded from Caremark’s formulary or have non-preferred status. Six weeks ago, CVS dropped one of Valeant’s former partners from Caremark’s network. CVS said at the time that it was terminating Philidor, a specialty pharmacy facing scrutiny after an internal audit found evidence of “noncompliance with the terms of its provider agreement.”

 

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