CVS vs. Walgreens | Clinic Bait | 2

0:09On a street corner in the coastal town of Rye, New York, Daniel Jorant counts the passing cars and trucks in his head. It's 1988, and Jornt's the new CEO of Walgreens. He's a tall, lean man in his late 50s, and the first person outside of the Walgreens family to run the company. And the pressure's on, because CVS is bulking up fast. The realtors showing Jornt possible sites for new Walgreens stores moves to seal the deal. It's a prime spot. Your people said you wanted to be in on the busiest corners of the city. I'd say this fits. Jorant says nothing, but it does look ideal. There's steady traffic and enough space for a 15 ,000 square foot Walgreens with parking and a drive-thru window.

0:54The realtor tries again. It's good, yeah? Jorant reaches into his coat and pulls out a stopwatch. We'll see. Jorant looks up at the stoplight. His thumb hovers over the stopwatch's start button. The light turns red. Jorant's thumb hits start. Milliseconds and seconds accumulate on the stopwatch's display. The realtor gulps. For years, Walgreens dominated the drugstore scene and stomped on every rival. But then, CVS bought Revco. Now, CVS has twice as many stores. Only Walgreens' superior sales per store keep it on top. And that's why Jorant's in Rye. He believes the war to supply America's medicine cabinets will be won in the streets, city by city, corner by corner.

1:46Jorant checks his stopwatch. The stoplight's been red for 30 seconds. Jorant wants Walgreens to claim the nation's best street corners before CVS can, so he's upped new store openings from 300 to 400 a year, and his real estate team is combing the country for cities where demographics and traffic patterns promise bumper profit. Jorant sighs as the time on the stopwatch sails past 45 seconds, 50 seconds, 60, 70, 80. Finally, the stoplight goes green and the traffic moves off. Jorant checks the stopwatch. The light stayed red for 90 seconds. He pulls the stopwatch away and turns to the realtor. This place won't work.

2:35Show me the next. Because of a traffic light? Next one, please. For Jornt, it's a deal-breaker. 90 seconds stuck at the stoplight is enough time for someone to change their mind about visiting Walgreens. And Jornt's got to keep moving, because time's short. CVS will soon finish digesting Revco, and once it does, It'll be back on the attack and closing in on the biggest territory in the pharmacy trade, Walgreens' home city of Chicago.

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5:16From Wondery, I'm David Brown, and this is Business Wars. chocolate bars

5:41Theongugster On the last episode, three generations of the Waggreen clan built an empire out of a small Chicago pharmacy. Melville Corporation dumped shoes and toys to go all in on CVS, and CVS swallowed Revco to become America's number two druggist. Now, CVS is closing in on Walgreens, and it's willing to spend lavishly to pull ahead. But it's not that simple. A new age of blockbuster drugs is swelling healthcare industry coffers. The sheer amount of money at stake shakes up the health care industry. It's creating new players and surprise alliances eager to cash in on the bounty. This is episode two of CVS versus Walgreens, Clinic Bait.

6:37It's spring 1997, and Jack Kramer adjusts his suit jacket and grins as he saunters down the new aisles of the CVS store in Akron, Ohio. Yesterday, this was a Revco store with aisles arranged at angles. Now, everything's dead straight, just as Kramer and CVS like it. Kramer's a silver-haired CVS executive, and he's here from headquarters to check in on this store's transformation. He sidles up to the team fixing new displays onto the walls and gives one workman and a hearty pat on the back. Excellent job, everyone. This store will be wonderful. Next, Kramer makes a beeline for the store manager, who's near the pharmacy counter watching the new gray CVS carpet being laid.

7:22Isn't this carpet great? Give stores a cozy feel, don't you think? But the manager has other things on his mind. Sure. Listen, senior citizens won't take well to losing their discounts on non-prescription items. Refco is known for that. Kramer puts a reassuring hand on the manager's shoulder. I know, I know. Change is difficult for everybody. We're going to give change a good name. Our regular prices will be less. So really, everyone gets a discount now. Soon, all 2 ,000 Revcos will undergo the same transformation. As CVS grows its brick-and-mortar footprint, The company turns to TV to make its brand familiar to its legions of new customers.

8:11At CBS Pharmacy, our pharmacists do more than fill prescriptions. They take the time to offer advice and the kind of personal attention that says they care about their customers, each and every one of them, one at a time. Out of the frame of this easy-to-swallow TV ad is a pitched street fight. And CVS's CEO Thomas Ryan is waging it using Walgreens' own battle plan. Like Walgreens, he's relocating stores from strip malls to street corners, where there are bigger profits to be made from convenience stores and drive-thru windows. But Ryan isn't mimicking Walgreens' expansion strategy. Walgreens might buy independent pharmacies here and there, but it mostly grows by building new stores.

9:01Walgreens' view is it doesn't want to inherit other people's bad real estate decisions. But CVS sees things differently. It sees buying out big drugstore chains as the cheap and fast way to scale. So, in early 1998, it buys Arbor Drugs, the 200-strong chain that dominates Detroit. And then, CVS points its guns toward Walgreens' home turf, Chicago.

9:34In a squat red brick municipal building in the Chicago suburb of Buffalo Grove, a village trustee peers over his glasses at his notes. Why do we need another drugstore? There's already a new Walgreens on the way. It's May 2000, and Buffalo Grove is the latest front line in the drugstore wars. CBS wants to open 200 drugstores in the Chicago area, and these village trustees are standing in its way. Chicago is the biggest drugstore market in America, ahead of New York and Los Angeles. And it's a Walgreens stronghold. There are 332 Walgreens in Chicago. Together, they ring up sales of$2 billion a year.

10:20And CVS wants a piece of that action. But Walgreens is already fortifying its position by opening even more Walgreens. Another Buffalo Grove trustee pipes up. Don't forget the other Walgreens. The trustee with the glasses looks confused. What other one? The one they're building in Wheeling. The suburb of Wheeling is less than a mile away. Oh, yes. So yes, two new Walgreens. Maybe the developer can explain why we would want a third new drugstore. The representative from CVS's developer stands. CVS will bring the competition and choice local residents currently lack. The trustees aren't convinced.

11:06Three drugstores within a couple of miles seem like overkill. But they're forgetting that drugstores aren't just pharmacies. They're convenience stores, too. People might come for medicine, but they usually leave with candy, lip gloss, or other impulse buys. and all those small purchases deliver big profits. But to get those sales, drugstores need to be in the most convenient locations. One trustee checks his notes again. Hmm. You're not just building a CVS on the site. You're building a bank, too, both with drive-thrus. I worry two drive-thru lanes will cause traffic problems. The other trustees nod in agreement.

11:49The developer thinks quickly. He doesn't have an answer for that concern. So he makes a tactical retreat. That concern deserves a full answer, which I cannot provide today. So I'd like to put our proposal on hold so we can get back to you on that point. The trustees shrug. Very well. Okay, so what's the next item? But CVS and Walgreens retail rumble isn't just unfolding in Chicago. They are now brawling in cities along the whole eastern seaboard from Boston to Miami and west to the Mississippi River. And their real-life game of monopoly pushes them into more and more extreme moves. They bulldoze historic buildings that stand in their way and open 24-hour pharmacies.

12:37They build stores closer and closer together until they're even squaring off at opposite corners of the same intersections. But all these new stores need pharmacists, and there's not enough. So they lure pharmacists away from smaller rivals using fat paychecks, generous retirement plans, and juicy stock options. And this rush of building, expansion, and hiring only works because of one huge demographic wave.

13:12In a large auditorium in Chicago, Walgreens president David Bernauer smiles and delivers another joke to the stockholders attending the company's annual meeting. Why did the aging person cross the road? The white-haired 56-year-old pauses and then delivers a punchline. Because there was a 24-hour pharmacy on the other side. Not exactly Comedy Central, but the audience is in good spirits. It's 2001 and 100 years since Charles Walgreens started the company. Their business is in excellent health. Walgreens' stock is up 43 % over last year. It opens a new store every 17 days. The company is still the number one drugstore in sales, and its future looks bright.

14:00Bernauer gets serious for a moment. In 1981, 15 % of our sales came from pharmacies. Today, it's 57%. And it's all thanks to gray heads like me. The audience laughs. The oldest baby boomers are nearing 60, and unlike their parents, they're packing prescription insurance. Demand for prescription drugs is destined to keep rising. When you're 50, you need on average six prescriptions a year. At 60, you need 11. At 70, 15. And people are going to live into their 80s, even 90s.

14:42Pharmacy sales are set to soar as millions of boomers start taking the new blockbuster drugs that treat common, ongoing problems like high cholesterol. As Walgreens races to cash in by opening stores even faster, CVS struggles to keep up. In the late 90s, CVS trailed Walgreens by a billion dollars of sales a year. By 2004, Walgreens is$7 billion ahead. And CVS's push into Chicago fizzled. Instead of opening 200 stores, it managed fewer than 90. Even buying 1 ,200 Eckerd drugstores from J.C. Penney failed to put CVS ahead. So CVS changes up its playbook. For years, it swallowed rivals in ape Walgreens street corner moves.

15:33But now, it's spotted a new startup in Minneapolis-St. Paul that it believes will draw patients away from doctors' offices and into their stores.

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17:30Liz follows the nurse practitioner into the small office at the back of her local Target store in Minneapolis. The sign over the door reads, Minute Clinic. You're sick, we're quick. The nurse practitioner smiles and invites Liz to sit. So what's going on? It's my throat. I woke up this morning and it was all scratchy. I want to check it's not strep throat, but I don't want to spend all morning in my physician's waiting room. Okay, let's do some checks. The nurse starts asking questions to check for anything more serious than this walk-in store clinic can handle. It does hurt when I swallow, but you can swallow food.

18:11Oh, yeah, yeah. Question's done. The nurse reaches for gloves in a swab. Okay, I'm going to do a test for strep throat. I just need to get a swab. All right, open up and say ah. Ah. What minute clinics nurse practitioners can and can't do is limited. They can test and treat basic illnesses and give vaccinations. They can also issue short-term prescriptions for some ailments. Physicians are divided about these walk-in clinics. Some fear patients will rely on them and lose contact with their physician. Others think Minute Clinic could free up physicians' time for patients with more challenging needs.

18:52A few think Minute Clinic will take away their easiest and most profitable market. But Liz doesn't care about any of that. All she cares about this morning is that she's getting seen fast. The nurse practitioner removes the swab from Liz's mouth. Great. I'll have your results in a minute or so. You can wait outside or go shopping and come back when you're ready. I'll wait. Liz steps back into the Target store. It feels strange to seek medical advice in a Target, but it's way quicker than seeing her primary care physician. Her minute clinic took 15 minutes. Last time she saw her physician, she waited two hours.

19:35The nurse emerges from the office with test results. Liz hasn't got strep throat, but she's saved a bunch of time and got a receipt for$46 for her insurer. Minute Clinic was founded five years ago by a doctor and patient who dreamed of a faster, cheaper way to get tests and vaccinations for common ailments like the flu, bladder infections, and pink eye. To keep costs down, they hired nurse practitioners, nurses with advanced degrees, instead of costly doctors, and opened inside grocery stores. Minute Clinics struggled to get patients, but then it began selling itself to employers and insurers as a low-cost alternative to physicians.

20:19Now, cost-conscious insurers send tens of thousands of patients to the nation's 22-minute clinics every year. And that's got CVS's attention. In April 2005, CVS strikes a deal to open dozens of MinuteClinics in its stores, starting with locations in Minnesota, Maryland, and Massachusetts. Walgreens scrambles to respond with walk-in clinics of its own. And a year after CVS's deal with MinuteClinic, Walgreens allies itself with store clinic operator Take Care. I'm fine. It's his sinuses. He was up all night. I'm fine. I don't think it's allergies because usually I get them too. I'm fine. I told him to stay in bed.

21:04He needs his rest. I need to go to work. I can't miss work. I'll make you some soup with a little of that hot sauce you like.

21:13I'm fine. No appointments. Open seven days a week. Most insurance welcome. It's quality family health care built around you. Take care clinics at select Walgreens. In summer 2006, Walgreens opens its first 10 take-care clinics. By then, CVS has 66 MinuteClinics, and it's ready to up the stakes. In July 2006, CVS buys MinuteClinic for$170 million. Soon after, Walgreens buys TakeCare. But MinuteClinic is only an appetizer. CVS now plans to become one of the health care system's biggest gatekeepers.

22:02It's November 2006, and in a large room with commanding views over Manhattan, CVS is out to sell its latest buyout plan to major investors. CVS CEO Thomas Ryan works the room with his charm set to maximum. How you doing? How are the twins? Oh, they're good. Very good. Thanks for asking. Just started high school. The 54-year-old CVS boss raises his eyebrows. High school? Already? Wow. Oh, excuse me. I'm needed over there. Ryan flashes a smile and hunts for more hands to shake. Ryan started at CVS as a pharmacy intern, but that's long behind him now. He's now the deal maestro who puts CVS's growth on steroids.

22:47But today, he wants to sell Wall Street on a deal that, even by CVS's standards, is a monster. Since 1990, CVS has spent$18 billion buying rival drugstores. Now, Ryan wants to blow more than that on just one company, Caremark. Caremark is one of American healthcare's biggest middlemen. It's what's known as a pharmacy benefits manager. They negotiate the prices that employers and insurers pay to cover prescriptions. The bigger the savings they deliver, the more they get paid by employers and insurers. It's a hugely profitable business. In 2005, Caremark made nearly a billion dollars in profits.

23:32And now, CVS wants to buy it for$21 billion. But that plan has left most of Wall Street scratching their heads. Drugstores and pharmacy benefit managers are natural enemies. They fight like cats and dogs. Pharmacy benefit managers like Caremark want to pay as little as possible for prescriptions. Pharmacies like CVS want to charge as much as they can. And if CVS owned Caremark, it would no longer just be Walgreens' biggest foe. It would also be one of its biggest customers, since Caremark sends tens of millions of prescriptions Walgreens' way every year. So the bankers, investors, and analysts in the room are eager for answers about CVS's curveball.

24:21The room goes quiet as Ryan heads on stage. CVS needs this deal. Pharmacy benefit managers are using their buying power to force pharmacies into selling prescription drugs at ever lower profit margins. He knows CVS won't be able to withstand that pressure indefinitely. The combination of CVS and Caremark will offer a better way to deliver pharmaceutical services and reduce costs in a complex health care system. The audience looks blank as Ryan fills the room with buzzwords. Landmark merger, end-to-end services, the opportunity to improve clinical outcomes, and lower costs. After Ryan invites questions, one analyst seeks clarity.

25:08Wouldn't a CVS and Caremark merger represent a conflict of interest? Ryan smiles. It's a natural concern. But if we want pharmacy benefit managers to send prescriptions to CVS, we must and already do offer lower prices. Right now, the price cuts Caremark negotiates with us are money lost. But if we own Caremark, that money just goes to another part of our business. The room isn't sure what to make of that. A fund manager lobs another question. What's the long-term vision here? You just bought Minute Clinic, now Caremark. A year ago, you were a drugstore. Where are you headed with this? Ryan smiles.

25:52We want to transform CVS into a healthcare provider. It's a logical evolution for CVS, Caremark, and the pharmacy industry. Uh, look, I'm struggling here. Help me out. Give me some clear examples of the benefits, even if they're only theoretical. Okay. We get to combine CVS and Caremark's buying power when negotiating drug prices with drug manufacturers. A wave of understanding washes over the audience. That they get. CVS buys a lot of medicine. Caremark does too. Together, they've got the power to squeeze major bulk discounts from drug makers. What else? Well, Caremark members will be able to pick up 90-day prescriptions at CVS stores instead of having to have it mailed.

26:44The room goes quiet. That's nice, but it's not$21 billion nice. Few leave the room excited. Just a handful get that this sideways move could propel CVS out of Walgreens' shadow. But Walgreens isn't the only player who needs to fret about CVS's interest in Caremark. Other pharmacy benefit managers are also worried, and one of them is so unsettled by this proposed marriage, it's going to try and break up the engagement.

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