Walgreens Boots Alliance to Displace CVS from the Tricare Network

Walgreens Boots Alliance will replace CVS as the in-network pharmacy for Tricare, the healthcare program of the US Military Health System. Tricare has 9.4 million beneficiaries, who receive an estimated 128 million prescriptions annually, equivalent to $13 billion in retail prescription spending every year. Express Scripts, the pharmacy benefit manager of Tricare, has announced that the change will take effect December 1, following negotiations with retail pharmacies to lower drug costs while maintaining access to pharmacies for Tricare beneficiaries. The change will result in the removal of more than 9,600 CVS pharmacy stores from the network, and the addition of around 8,000 Walgreens stores. This will reduce the total number of pharmacies in the Tricare network to 58,000, but still provide in-network pharmacy access to 98% of beneficiaries within a five-mile radius of their home. The network coverage could increase if antitrust regulators approve Walgreens’ acquisition of Rite Aid, the third-largest drugstore chain in the US. In addition to the drugstore locations, certain CVS Specialty medication services provided by mail order will be affected. Beneficiaries will have to switch their prescriptions to another service provider within the pharmacy network or pay the full price for services provided by CVS. Prior to its merger with Alliance Boots, Walgreens was in the Tricare network for a time. Walgreens had a contract dispute with Express Scripts in 2011 and, even though the dispute was resolved, the pharmacy benefit manager decided to exclude Walgreens from Tricare’s network. Tricare had accounted for an estimated $5.3 billion in annual revenue for Walgreens before it was excluded from the network.

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Walgreens has worked aggressively to provide low-cost drug plans for pharmacy networks, and the company’s recent attempt to acquire Rite Aid is aimed at displacing CVS as the largest drugstore chain in the US. Tricare’s change to its drugstore retail network will bring incremental tailwinds to Walgreens, but headwinds to CVS. The change is expected to add $2.3 billion to Walgreens’ top line, or $0.06–$0.08 in EPS, at the expense of CVS. In 2015, Walgreens reported revenue of $103 billion, while CVS’s revenues reached $153 billion. The industry will be subject to further changes if the Rite Aid acquisition is approved. The acquisition attempt was announced on October 27, 2015, as a deal of $9.4 billion in cash to Rite Aid’s shareholders. Walgreens has been divesting stores in hopes of easing antitrust concerns as it seeks regulatory approval for the acquisition.