CVS vs. Walgreens | A New Prescription | 3

0:08In Deerfield, Illinois, Greg Wasson enters the Walgreens conference room and smiles at the company's senior executive team. The executives are already in the seats, armed with legal pads, laptops, and BlackBerrys. The executives smile back, but no one's actually feeling upbeat. It's February 2009, and Wasson's just become Walgreens' CEO. He's 50, with a gray crew cut and small rectangular glasses. He's eager to push the company out of its comfort zone. He sits down at the head of the table. Well, the past few months, years really, have been hard. But today I want us to step back and plan for tomorrow.

0:51The executives murmur in agreement. They know Walgreens needs a jump start. Last October, Walgreens fumbled its chance to buy California drugstore chain Longs. Soon after, the company's previous CEO left abruptly. Now, the Great Recession's laying waste to its sales and stock price. But Watson knows there are deeper problems, too. For 20 years, we've tried to grab the best street corners in America. It's been effective, taking us from 1 ,500 stores to 7 ,000 stores today. The team waits for the but. Watson doesn't disappoint. But we're near a saturation point where opening new stores often hurts existing ones.

1:35What we need to do is draft a new plan for growth. The executives go all in, excitedly lobbing ideas back and forth. We need a loyalty program. Give customers a reason to come back. You know what I mean. They come back into the store, that sort of thing. But what Wasson really wants is a way to strike back at CVS, the drugstore that's winning the war. Go international. I think we should buy a pharmacy benefit manager. It seems to work for CVS. That stops things cold. Those are fighting words. I 100 % disagree. Pharmacy benefit managers are erasing our pharmacy's profit margins and making medicine more expensive.

2:17To me, CVS buying Caremark is a case of if you can't beat them, join them. But we're Walgreens. We can beat them. Watson smiles. Agreed. Buying a pharmacy benefit manager is a non-starter. All right, what else? We could buy Duane Reade. The room falls silent again. Duane Reade drugstores dominate New York City. It's a big prize. But Walgreens has never done such a big acquisition. And building stores is more in its comfort zone. The team looks at Wasson, waiting to see how he'll react. Wasson nods. Now that's an interesting idea. The executives break into smiles. Walgreens might be beaten and bruised, but it's not out.

3:08They're bursting with fresh ideas and ready to take on CBS. But that fighting spirit soon will be tested.

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5:24From Wondery, I'm David Brown, and this is Business Wars.

5:54On the last episode, the drugstore giants battled for street corners. CVS bought pharmacy benefit manager Caremark, and walk-in clinics popped up inside the nation's pharmacies. It's 2009, and Walgreens is at a crossroads. CBS has gone from bit player to the nation's leading pharmacist in 15 years. So now, Walgreens is about to bust some major moves to turn the tables. This is Episode 3, A New Prescription.

6:31Greg Wasson hurries through the chilly streets of midtown Manhattan with his eyes fixed on the Duane Reade drugstore up ahead. He pulls his baseball cap down tight over his skull, shoves his hands into the front pockets of his sweatshirt, and enters the store. It's February 2009, and Wasson's spending his weekend checking out the drugstore chain New Yorkers love to hate. Dwayne Reed rules New York. Their drugstores are famous for shoddy service, but they're inescapable. There are more Dwayne Reeds in the Big Apple than McDonald's, and the store Wasson stepped into is no different. It's a maze of narrow aisles cluttered with merchandise arranged in no discernible order.

7:14Wasson approaches an employee. Excuse me, where are the bandages? The worker thinks for a moment. Somewhere over that way, I think. Wasson's not surprised. He's visited enough Duane Reads by now to understand why the chain's own website is lower in search results than blogs with names like Duane Reads Sucks. Wasson leaves the store and picks up the pace, and that's because he knows the next Dwayne Reed on his list is different. It's on Broadway, right by Herald Square, and it's one of two dozen New Look Dwayne reads. Wasson reaches the store and sees the difference immediately. The merchandise is now grouped by categories that make sense.

7:56The grocery section is stocked with steel-cut oats, tomato basil soup, and brownie bites. The cosmetics section feels like it belongs in a department store. Other revamped Dwayne Reeds have sushi and nail bars. Wasson spots an employee stocking shelves. Excuse me, where are the bandages? The employee shrugs. Wasson almost smiles. Walgreens could learn a lot from these forward-thinking drugstores, and Dwayne Reed could learn a lot about service from Walgreens. And that makes it an ideal acquisition. In February 2010, Walgreens buys Duane Reade and its 257 stores for$1.1 billion. With the buyout, Walgreens has more stores than CVS once more.

8:46But these days, Walgreens doesn't just fight CVS for retail sales. It also battles with Caremark, CVS's pharmacy benefits are. Every year, Walgreens fills tens of millions of prescriptions for people on Caremark plans. So every time Walgreens fills a prescription for Caremark, CVS gets a cut. And that makes CVS both Walgreens' biggest rival and one of its biggest customers. So on June 7, 2010, Walgreens makes an unexpected move. Drugstore chain Walgreens says it's cutting ties with its competitors' pharmacy benefits. Walgreens will no longer honor CVS Caremark. This week's decision does not affect current Caremark plans.

9:33Rather, Walgreens will not participate in new or renewed Caremark prescription drug plans. The move stuns Wall Street. It never imagined either company would dare shut the other out. Walgreens is the nation's largest pharmacy chain. But Walgreens makes$5 billion a year from filling Caremark prescriptions. They're like two vipers inextricably intertwined. Two days later, CVS punches back. It announces it will drop Walgreens from all Caremark plans from early July. That means that if any of Caremark's 53 million members get prescriptions filled at Walgreens, they'll have to pay full price for their medicine and then have to claw back that money from Caremark.

10:18CVS and Walgreens spend the next week in a public standoff as millions of Americans wonder whether they'll need to change pharmacists. But after 11 tense days, CVS and Walgreens reach a compromise. They realize that despite their rivalry, they can't live without one another. More trouble lies ahead for CVS, but this time it has nothing to do with Walgreens.

10:47It's October 2010 and after dark in downtown Los Angeles, but the lights are still on inside the U.S. attorney's office. In a large meeting room, the prosecutors and CVS's lawyers are guzzling coffee and battling fatigue to hammer out a deal. A deal that will save CVS from prosecution. Between September 2007 and November 2008, CVS became a major source of pseudoephedrine for criminals looking to cook methamphetamine in illegal drug labs. Pseudoephedrine is a common ingredient in cough and cold medicines, but under federal law, pharmacies are prohibited from selling more than 3.6 grams a day to any individual.

11:29But thanks to flaws in its computer system, CVS pharmacies in California and as many as 24 other states allowed individuals to buy far more than that. And what makes it even worse is that some people within the company knew about the problem and failed to act. A U.S. attorney moves on to the financial penalties CVS will face. Then we're agreed. CVS pays$75 million in civil penalties and$2.6 million in forfeited profits. The CVS legal representatives confer. Then one of them replies, Yes, and payment is due within 30 days. The U.S. attorney's office team confers, No, payment by tomorrow. The forfeited profits by tomorrow, the civil penalty within 30 days.

12:21No,$75 million tomorrow, the forfeited profits within 30 days. The CVS lawyer nods. That is a small price to pay for avoiding a court case that could have been a public relations disaster. But while CVS puts the past behind it, Walgreens is readying a high-tech weapon to blow a hole in CVS's sales.

12:49Fall 2010. In the Walgreens conference room in Deerfield, Illinois, excited Walgreens executives form a line alongside a table loaded with finger food and decorated with red balloons. On the room's large screen, a PowerPoint slide displays the words, Disrupting the Lab Industry. At the front of the line, a woman in a black turtleneck jumper with blonde shoulder-length hair beckons the first executive forward. She's Elizabeth Holmes, the founder of Theranos. a new Silicon Valley startup that's promising to revolutionize blood tests. It's just one finger. No big scary needles here. The first executive in line offers an index finger.

13:29Holmes moves in with a small test tube-like device. The executive feels a small pinprick. Drops of blood collect in the tube for a few seconds, then Holmes smiles. That's it. That's it? Yes. With just a few drops, our machine can run multiple tests. We should have your vitamin D results soon. The executive leaves genuinely impressed. Blood tests are a time-sucking bottleneck in the healthcare system. For anything beyond the most simple tests, blood needs to be taken, sent to laboratories, and then the results sent back. But Theranos is promising to make that a thing of the past. It created a rectangular black-and-white machine about the size of a microwave.

14:11Holmes says this machine will be able to analyze dozens of blood tests cheaper and faster than the laboratories. That promise has got Walgreens so excited that it signed an exclusive deal to bring Theranos machines to its drugstores. The executive can almost hear the TV commercials in his head already. One-day blood tests only at Walgreens. The alliance between Walgreens Retail Reach and Theranos' Silicon Valley Tech promises a healthcare revolution that will prompt millions of CVS customers to switch allegiance. And it would if Theranos' tech wasn't alive.

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16:34October 2010, Deerfield, Illinois. Kevin Hunter frowns as Theranos founder Elizabeth Holmes addresses the Walgreens team during their weekly video call. These will be laboratory-developed tests. Hunter interrupts. He's a consultant hired by Walgreens to assess Theranos' blood test technology. And to him, something about Holmes' startup doesn't smell right. For months, Holmes has evaded his questions, refused to show Walgreens its laboratory in Palo Alto, and offered constant excuses about why it's yet to deliver the results of its blood test on Walgreens' senior executives. Sorry, Elizabeth, did you just say laboratory-developed?

17:17Yes, they are. Hold up, Elizabeth. You told us that the blood test would be cleared by the FDA for home use. Laboratory-developed isn't the same. It takes us into a different regulatory arena where tests don't need to be as simple or as accurate. It's a significant change. Holmes' eyes narrow. Hunter's a thorn in her side. It isn't significant. I'm sorry, it really is. You're going from FDA-approved tests to less closely regulated tests. All big lab companies use laboratory-developed tests. Hunter fumes. He knows that's not true. But he senses this debate is too arcane for the decision-makers around him.

18:00So he switches tact. And that reminds me. We still need to do a comparative assessment of your tests. We could do tests on, say, 50 patients and have you and Stanford Hospital do the same tests on them and see how the results compare. I know people at the hospital. I can arrange it. On the screen, Holmes stiffens. No, I don't think we want to do that at this time. Hunter seethes as Holmes swerves and moves the discussion on. He's now convinced that her evasiveness isn't just about commercial sensitivity. Theranos is hiding something. After the video call, Hunter pulls aside the Walgreens point man on the Theranos project.

18:44Listen, something's off here. There are red flags everywhere. They won't even do a simple comparison study. They drew your boss's blood and failed to deliver the results. You need to force them into this study. The executive averts his gaze. No, we can't risk a scenario where we lose Theranos to CVS and their technology turns out to be real. Then let me open the prototype machine they left with us and see what's inside. How about that? Absolutely not. We've signed a confidentiality agreement. Their lawyers have warned us not to tamper with that device. Hunter stares at the executive. He can tell that he's also starting to question Theranos' claims.

19:26but right now the question marks surrounding Theranos and its tech aren't enough for Walgreens to risk handing CVS a win. In early 2011, Holmes asks for Hunter to be removed from the team. She gets her way.

19:48CVS headquarters, Woonsocket, Rhode Island. The 400 executives in the company auditorium stand and applaud as Larry Merlo strolls onto the stage. It's March 2011, and the 55-year-old Merlo is the new CEO of CVS Caremark. He started his career as a pharmacist at a people's drugstore several years before that chain got bought by CVS. Since then, this Super Mario lookalike has climbed the ladder all the way to the top. Now, he wants to take CVS to the next level. He presses the button of the clicker in his hand. On the auditorium screen, two corporate statements appear side by side. These are our mission and vision statements.

20:30I want to know if you know which is which. You should all have voting handsets under your seats.

20:39Merlo gives the executives a moment to find their handsets and then continues. If you believe this statement here on the left is our vision statement, press one on your handset. Merlot waits as the audience votes. He's pretty sure what the outcome will be, but his executives might surprise him yet. He sees an assistant at the back of the room signaled that the votes are in and ready to share. Okay, let's see how you all did. Merlot presses the clicker. The results appear. 51 % got it right. 49 % got it wrong. 51-49, nearly 50-50. and exactly the results you'd expect if you were all just guessing.

21:25Now, I want you to take a good look at these two statements because this is the last time anyone in CVS will see them. The point is, we've not put these statements into practice. They do not relate or connect to what we do. So tomorrow, I'll ask a small group of you to devise a new statement, A statement of purpose. A statement that will define CVS going forward. The new credo they come up with is helping people on their path to better health. CVS now sees itself as a health company. And that will drive it down a very different path from Walgreens. Because while CVS is embracing health, Walgreens is positioning itself as the retail champion.

22:15June 2011. In Walgreens headquarters in Deerfield, Illinois, CEO Greg Wasson sits in silence and weighs a decision that could wipe out$5.3 billion of sales. One of the senior executives in the room underlines the situation again. The talks are in total deadlock. Express Scripts are digging in. Express Scripts is one of the biggest pharmacy benefit managers. It's a major rival to CVS Caremark, but its three-year deal with Walgreens expires at the end of the year, and the renewal talks are going nowhere. Express Scripts has told Walgreens it must lower its profit margins if it wants to keep filling prescriptions for its members.

22:57Walgreens has had enough of getting pushed around by the likes of Express Scripts, not least because Express Express Scripts is attacking it on two fronts. Express Scripts not only is trying to erode the profits Walgreens makes on filling prescriptions, it's also encouraging patients to use its own mail-order pharmacy service instead of using Walgreens stores. Express Scripts assumes that Walgreens won't dare walk away, but it's misjudged the mood in Walgreens' C-suite. Wasson straightens up. What Express Scripts wants is a long-term threat to the health of retail pharmacies. We must make a stand now.

23:37Tell them they give ground or we leave their network by the end of the year. The executives nod. They're about to go into battle with a business that sends 90 million prescriptions to its stores every year. And they know things will get ugly. But to Wasson, this is more than a business spat. It's a crusade, a fight to save retail pharmacy from the middlemen that are eating it alive. They think their chances are good. Last year, they stood up to Caremark and won concessions. If they can make CVS back down, Express Scripts should be a pushover. At first, few believe Walgreens' threat to split with Express Scripts.

24:19Analysts assume it's just a negotiating ploy and the spat will be short-lived. But this time, neither side is willing to compromise. Walgreens reckons it's got the heft to bring Express Scripts to heel. Express Scripts believes that if Walgreens carries out its threat, its members will just head to CVS or another pharmacy instead.

24:46It's December 2011, and time is almost up for Walgreens and Express Scripts to reach a deal. And with the deadline day closing in, both companies have come together for one last-ditch attempt to avert a split. But it's not going well. Express Script CEO George Paz shakes his head. Our position is the same as it's been for the past six months. The use of generic drugs is expected to increase. That must be reflected in the figures. Walgreens Chief Wasson frowns. That won't happen. You made savings commitments to your clients, but you don't get to do that off our backs. Greg, you're looking at this all wrong.

25:26In less than a week, millions of Walgreens customers who are on our plans won't be going to your stores. They'll be heading to CVS or Walmart. More than 90 % of our members have an alternative to Walgreens within a half a mile. Wasson crosses his arms. We are an industry leader in the use of generics. We offer 90-day prescriptions at retail. If you leave us, your costs will increase. Pause, sighs. We're not leaving you. You're leaving us. But we're going around in circles here, Greg, and we're both busy men. One of us is about to make a multi-billion dollar mistake, and I don't think it's me. You don't think it's you.