CVS stock hit by Walgreen's letter

NEW YORK (CNNMoney.com) -- CVS Caremark shares fell to their lowest level in seven months, after Walgreen Co. said it will no longer participate in new or renewed benefit plans from its rival's drug benefits unit.

Shares of CVS Caremark closed down more than 8%, at $31.04. They were down as much as 12% before rebounding.

Walgreen stock slipped 2.7%, to $30.

In a letter to CVS Caremark (CVS, Fortune 500), Walgreen (WAG, Fortune 500) cited various grievances behind its decision to cut off some of its ties with the company. Among them was CVS Caremark's Maintenance Choice plan, which requires patients with chronic conditions to fill prescriptions at CVS or through Caremark mail services, instead of at Walgreens or other pharmacies.

Walgreens also said in a statement that CVS Caremark's reimbursement rates for drugs were unpredictable and "often don't reflect the market."

Drug benefits provider Caremark merged with retail pharmacy CVS in 2007. When CVS CEO Tom Ryan proposed the merger in 2006, he promised that the Caremark business would not play favorites with where a prescription would be filled. But the Walgreens complaint joins those of other drugstores, large and small, about Caremark's bias toward CVS stores.

"We believe we are now viewed and treated by CVS Caremark's [pharmacy benefit manager] less as a valued business partner and more as a competitor to CVS retail stores, and as a result, it no longer makes good business sense for us to grow our book of future business with CVS Caremark," Walgreens President and CEO Greg Wasson said in a call with investors Monday.

Prescriptions that fall under CVS Caremark plans constitute about 7% of Walgreen's total sales, so the decision was not made lightly, Wasson said.

CVS Caremark issued a response, saying it was "surprised and disappointed" by the announcement.

"Today's announcement by Walgreens is nothing more than a transparent effort to raise its reimbursement rates at the expense of plan sponsors and members and illustrates an inability to adapt to the demands of the marketplace in today's challenging and rapidly evolving health care environment," the company said.

Walgreens operates 7,500 drugstores throughout the country and CVS has about 7,000.

The announcement came as a surprise during a very disruptive season for pharmacy benefit managers, said Jeff Jonas, a research analyst with Gabelli and Co., which owns shares of both CVS Caremark and Walgreens.

Major health insurance companies often decide mid-year on which pharmacy managers to partner with to offer their prescription drug programs. For CVS to take a hit during its prime "selling season" could hurt the company's results when new insurance contracts start in January, Jonas said.

"If you're potentially losing 7,500 stores from your network, that's going to play into the bids for next year," he said.

CVS Caremark's two biggest drug benefits rivals, Medco Health Solutions (MHS, Fortune 500) and Express Scripts (ESRX, Fortune 500), each saw their stocks gain more than 4%.

Jonas predicts Walgreens and CVS will resolve their differences, but in the meantime, uncertainty about the negotiations could play into CVS's stock price for weeks.

The National Community Pharmacists Association issued a public statement urging the Federal Trade Commission to investigate CVS Caremark for unfair business practices.

"The evidence is piling up and hopefully corrective action will be taken that either erects substantial walls between CVS and Caremark or rescinds the merger so that the market can operate equitably without one company abusing the system," Joe Harmison, president of the industry association, said in the statement.

Walgreens said while it will not take new or renewed plans, it will continue to honor its patients who already use CVS Caremark plans at Walgreens pharmacies.