How Walgreens Took Advantage of CVS’s Vertical Supply Chain Reliance

The vertical supply chain model that was adopted by CVS Health paid off quite well for the drug store chain initially, but now competitor Walgreens has found a way to give the drug store chain a run for its money.

When CVS Health acquired the country’s top pharmaceutical benefit manager (PBM), Caremark, and integrated its supply chain, it reaped tremendous benefits, saving on internal costs and bringing lower prices to its vast customer base. PBMs serve as brokers of sorts, negotiating between retailers and pharmaceutical manufacturers. The move enabled the company to transfer price negotiations inside the corporate structure and offer prescription customers a mail-in service. Sales in their Pharmaceutical Services Segment outperformed their Retail and LTC Segment by 20 percent, while 12 percent of their PBM sales were made internally during the third quarter of this year.

However, Walgreens has found a way to exploit CVS’s reliance on its vertical supply chain by spreading its network horizontally. It has also partnered with some of CVS’s main PMB and retail competitors for added leverage.

Turning the Situation Around

While vertical supply chains like CVS’s often boast internal cost savings, they can depend too much on a single supplier, which does not guarantee they will always get the best selection or lowest prices. Walgreens’ exclusionary partnerships with two major PBMs, Tricare and Prime Therapeutics, will see thousands of customers switching allegiance to its stores. Meanwhile, Walgreens’ recent acquisition of Rite Aid for $9.4 billion will allow it to strengthen its existing mail-in services and compete directly with those offered by CVS.

Now, CVS Health estimates it will lose 40 million prescriptions in 2017 to Walgreens on account of its deals with the PBMs. Last year, CVS Health fulfilled 1.03 billion prescriptions in more than 9,000 pharmacies, while Walgreens filled 929 million prescriptions in around 13,000 pharmacies.

This blog post was based off of an article from Supply Chain Dive. View the original here.

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