CVS vs. Walgreens | The Doctor is In | 4

0:07It's 2013 on CVS Caremark's sprawling corporate campus in Woonsocket, Rhode Island. In a large meeting room with floor-to-ceiling windows overlooking manicured lawns, CVS boss Larry Merlo is giving a presentation to a major health care provider, and the excitement is building. He and his team want to forge a multi-million dollar partnership with this health care provider. They hope it will drive more patients through CVS's doors, and so far Merlo's audience seems keen. Merlo moves to the last slide of his sales pitch. Visitors from the health care provider lean forward in their seats. Finally, I'd like to share some results from our efforts at CVS to improve our customers' medical adherence.

0:50The health care team excitedly jots down the figures on the screen. Medical adherence, or staying on a prescribed medication, is a big deal for this health care provider. Patients who don't regularly take their meds generally get sicker and end up having unnecessary medical treatments. They cost America an estimated$290 billion every year. It's also a problem for CVS, because if people aren't taking their meds, they're not refilling their prescriptions at CVS. Merlo highlights the figure he knows will impress his visitors the most. As you can see, with our adherence outreach program, patients are 25 % more likely to obtain their refill.

1:30Sounds good. Right? The visitors' eyes widen. They could save tens, maybe hundreds of millions if they don't have to pay for all those unnecessary hospital treatments caused by patients not taking their medicine. And at the same time, CVS will profit from all those refills. It's a win-win arrangement. Merlot's Super Mario mustache turns up into a smile. Maybe this time, everything will come together. But then, one of the healthcare company team raises his hand. Please, ask away. Larry, this is all fantastic, but I'm concerned about the optics here. We're a health care company, and you, well, you sell cigarettes.

2:16Isn't it a bad look for us to be working with a cigarette retailer? Merlot's upturned mustache droops. The rest of the CVS team sink lower in their seats. The excitement in the room vanishes. The executive from the health care provider presses his point home. We're a health care company. I mean, how can we direct patients to CVS when it's one of the biggest tobacco retailers in America? There is that. That's a good point. Yeah. The guy's colleagues nod. Merlot cringes. The problem of selling cigarettes is happening again. Time after time, CVS gets close to striking a major health care deal, only for it to be scuttled at the last moment because CVS won't stub out its tobacco habit.

3:03The head of the visiting delegation stands up. Merlo looks alarmed. You're leaving? Larry, everyone. This was really exciting. Come on, let's at least talk it through. I'm sorry, Larry, but the tobacco issue, that's an insurmountable problem. We're a medical company. We can't partner with a company that sells cigarettes. Merlo tries to salvage the fast disappearing deal. Come on, at least stay for lunch. Thank you, but no, we should get back. We've got a long journey ahead. Merlo watches the visitors file out of the room. Inside, he's fuming. Tobacco's holding CBS back and endangering its future.

3:46Merlo knows it's got to go. But quitting won't be easy. Because to do it, Merlo must convince CBS's board to let him snuff out sales worth$2 billion a year.

4:05When planning for your future, you want someone with a history of keeping their word year after year. For nearly 160 years, Pacific Life has been a trusted name in the industry. But that isn't just a number. It's experience that matters. It's 160 years of promises held, helping generations retire with confidence, protect their loved ones, and plan for whatever comes next. Whether you're looking for life insurance, employee benefits, or retirement income solutions, when your future is on the line, you want history on your side. And believe me, Pacific Life has been there, always there through changing times, always focused on your needs.

4:44Ready to secure your tomorrow? Ask a financial professional how Pacific Life can help you feel prepared for what's next. Pacific Life Insurance Company, Omaha, Nebraska, and in New York, Pacific Life and Annuity, Phoenix, Arizona. because with Pacific Life, you're not just planning for the future, you're partnering with trusted experience. Closing the books, getting your people paid, and bringing on new hires. Running a small or mid-sized business can be exciting and also a little chaotic. Workday Go makes simplifying your business, well, simple. Imagine all the important aspects of your company, HR, finance, and payroll, all on the AI platform.

5:25No more juggling multiple systems, no more worrying about growing too fast. Just the full power of Workday Go, helping small to mid-sized businesses like yours scale and run more smoothly. Think about what that means. Seamless onboarding for new team members, real-time insights at your fingertips, and payroll that works perfectly every single time. So you can focus on the big picture and go after your big ambitions. And with Workday, you can activate quickly in as little as 30 to 60 business days. So simplify your business. Go for growth. Go with Workday Go.

6:08From Wondery, I'm David Brown, and this is Business Wars.

6:36On the last episode, CVS tried to use Caremark to press Walgreens into lowering the profits it makes from filling prescriptions. Walgreens limped away from its battle with Express Scripts, and Italian billionaire Stefano Pessina agreed to sell Alliance boots to Walgreens. Now, Walgreens is stepping onto the world stage as it prepares to complete its acquisition of Pessina's European pharmacy empire. But it won't be the coronation it was expecting. CVS, meanwhile, is looking to quit smoking so it can charm the healthcare industry. This is Episode 4, The Doctor Is In.

7:22January 2014. In the CBS boardroom in Woonsocket, Rhode Island, CEO Larry Merlo is a wreck. Bags under his eyes betray sleepless nights in anticipation of this dreaded moment. He's about to ask the company's board of directors to back a plan to inflict major damage to CBS's finances. Merlo looks down the long boardroom table. The faces of CBS's directors stare back at him. He's primed a few of them in advance about his plan, but most of them will be hearing of it for the first time today, and there's no telling how they'll react. Merlo takes a deep breath, then starts talking. Our strategic goal is to pursue growth opportunities in health care, but many health care providers will not work with us because we sell tobacco.

8:14So, today, I'm asking you to support my decision to stop selling tobacco in our stores. One of the board members responds. Okay, Larry, but what impact is this going to have on the business? Tobacco accounts for around$1.5 billion of our annual revenues. Associated products like breath mints add another half billion. It's not just tobacco sales that are on the line. It's everything that smokers buy at CVS, from chewing gum to disposable lighters and more. So you want permission to eliminate$2 billion of CVS's sales? Yes, but this is short-term pain for long-term gain. Tobacco sales are in decline, and the healthcare companies we want to work with don't want to work with us because we sell cigarettes.

9:05So we have to stop selling cigarettes. Another director pipes up. Okay, where does this end? We get rid of tobacco, then what? People will go, oh, actually, soda, chips, candy, and liquor aren't good for you either. So do we remove those from the stores too? Merlo smiles. I asked myself that exact same question. So I did some low-key surveys of health professionals, and they told us, yes, there are health issues with those other products, but in moderation, they're fine. Cigarettes, however, they're addictive. They're dangerous. Merlot wavers for a moment and then makes the argument personal. Also, when we examined the pros and cons of this, there was one thing that became very clear.

9:49Most people have lost folks they love to smoking. My own father smoked. He died at age 57. Tobacco robbed me and him of the time we could have spent together. This is the right thing for us to do. The directors fall quiet. They, too, have lost people to tobacco. Nearly 450 ,000 people a year die in the United States because of tobacco. The company's chairman breaks the silence. I support the plan. Does anyone object? Objection here. The directors shake their heads. The chairman smiles. Then that's agreed. Larry, you have our backing. One director looks Merlot in the eyes. And Larry, don't just do this.

10:36Make sure you tell the world about it, okay? Larry does just that. In February 2014, CVS announces it will stop selling tobacco. Announcement this morning from CVS. The national drugstore chain is phasing out the sale of cigarettes, a move that could cost billions in sales. And ABC's Rebecca Jarvis here to explain why. Good morning, Rebecca. George, good morning. It is the first and largest drugstore chain to take this monumental step. And here's a first look at an ad that will be running tomorrow in newspapers across the country. CVS quits for good. The announcement knocks CVS's stock down 7%, but politicians and physicians shower the company with praise.

11:20The move also places Walgreens under heavy political pressure to follow suit. Within days, 28 state attorneys have written to the company urging it to follow CVS's lead. But for Walgreens, the equation's different. Unlike CVS, Walgreens doesn't own a pharmacy benefits manager. CVS can ditch cigarettes and recoup the lost sales by getting more health plans signed up with Caremark. But for Walgreens, there's no upside to the sales sacrifice. So it doesn't change course. But tobacco is not the only reason Walgreens is facing political heat.

12:06In a Four Seasons hotel suite with views of the Eiffel Tower, Walgreens boss Greg Wasson is outnumbered. It's April 2014, and with him in the room are representatives from Goldman Sachs and three powerful hedge funds. And they all want Walgreens to move its headquarters to Europe. One of the hedge fund executives presses the case. Relocating to Switzerland is the smart move, Greg. It'll wipe hundreds of millions off Walgreens' tax bill. Wasson bristles. Walgreens is finalizing its plan to buy and merge with the European pharmacy giant Alliance Boots. But that's raised the question of where the merged company will be based.

12:48Six months ago, Wasson declared that Walgreens would stay in America. Now, these major investors want him to reconsider. The hedge fund executive keeps pushing. It's instant value for stockholders. You have a fiduciary responsibility to do what's best for them. This will cause major fallout in the United States. The political and consumer backlash would be enormous. Wasson glances at Stefano Pessina, the white-haired 72-year-old chairman of Alliance Boots. But the Italian billionaire disagrees. He's been here before with the British drugstore chain Boots. We moved Boots' tax base from Britain to Switzerland, and it reduced our tax bill by$160 million.

13:31This'll be the same, but much, much bigger, Wasson interjects. There were protests, remember? Cassina shrugs. Well, the protesters were wrong. We used the money we saved to create wealth, and people still shop at Boots. It'll be the same with Walgreens. Wasson isn't so sure. Well, America's pharmacy trade is more competitive. But Boots doesn't have to worry about people switching to CVS. And don't forget many stockholders will get hit by the IRS for capital gains tax if we move to Switzerland. Another of the hedge fund managers leans forward. It won't affect stockholders outside America, pension funds or mutual funds.

14:14I'm talking about individual stockholders. Plenty of them are American. The majority of stockholders will be better off. The first hedge fund manager moves in again. Let's table this for a moment. I'd like to talk about what happens after you buy Alliance Boots. Wasson nods. All right. We'd like to see members of the Alliance Boots team in key positions. Wasson glances at Pessina. Frankly, Walgreens is underperforming. In the past ten years, Walgreens stock dropped 7 % while CVS stock rose 200%. Walgreens needs to deliver better products and reduce overhead. We believe it should use every tax advantage at its disposal, including moving to Switzerland.

15:00I'll give the tax inversion due consideration. It's instant shareholder value. The tax bill will be reduced by billions. I'll consider it, but I'm still concerned about the political risk to the brand and the company. The meeting ends without a decision, But Wasson and his team are now contemplating relocating to the Alps. And in the United States, that ignites a public backlash.

15:34It's July 2014, and outside the Wrigley Building in Chicago, a few dozen protesters are holding up handwritten signs bearing slogans like, Stay in the USA! And don't go offshore. They've come to deliver a petition signed by 70 ,000 people to Walgreens' flagship store. And they're angry. The corporation first opened its store here in Illinois in 1901. But now its executives and a small faction of its shareholders are giving serious thought to moving its corporate address to Switzerland, thereby abandoning America. That ain't right. That ain't right. And why? Because Switzerland is a tax haven. And as Walgreens mulls over whether it should stay or go, the outrage keeps building.

16:22President Barack Obama and members of Congress join the critics' chorus. Soon, there's talk of legislation to stop companies from relocating overseas solely to duck taxes. Faced with the mounting anger, Wasson announces that Walgreens will stay in America. But then, another bombshell hits the drugstore giant. In July 2014, the company announces it miscalculated its pharmacy sales forecast by a whopping$1.1 billion. It's a stunning stumble, and it shatters investor confidence in Walgreens management. With a$16.2 billion buyout of Alliance Boots imminent, alarmed investors are looking for change at the top.

17:11And that plays right into the hands of Stefano Messina.

17:22December can be a busy month for all of us. Finishing projects, planning for next year, maybe even wrapping a few presents, while your teams take a well-deserved break. Cyber threat actors don't. Stay protected this holiday season with Manage Engine. Their cybersecurity solutions ensure that your data is secure. even while your office lights are turned off. With 18 data centers around the world and over 20 years of experience securing global enterprises, Manage Engine can keep your business running safely, no matter how busy or hectic the world gets. This holiday, gift yourself and your business peace of mind.

18:01Visit cybersecurity.manageengine.com. That's cybersecurity.mangine.com.

18:35offer in minutes. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at AppleCard.com.

18:57On the trading floor of the Nasdaq Stock Exchange in New York, Greg Wasson hollers and claps as the opening bell rings out and blue and green confetti rains down. It's January 9th, 2015 and Walgreens Boots Alliance has just been born. The three-year engagement is over. The American drugstore giant and Europe's top pharmacy company are now wed. And they are a power couple with more than 12 ,600 stores and a worldwide drug distribution network and a total value of $116 billion. But Wasson's no longer the boss. That title now belongs to the billionaire to his right. Stefano Pessina hugs Wasson and grins ear to ear.

19:46He's just pulled off the greatest deal in a lifetime of deal-making. Officially, Walgreens bought the smaller Alliance boots, but in practice, This is a Pacina takeover of the U.S. drugstore chain. When Walgreens asked to buy Alliance Boots in 2012, the U.S. giant was struggling. CVS was powering ahead, and Walgreens' showdown with Express Scripts had caused a consumer exodus. Walgreens needed a win, and Pacina was pleased to help for a price. Walgreens paid$17.4 billion in cash and stock for Alliance Boots. Piscina now emerges with a 13 % stake in Walgreens Boots Alliance and the title of CEO.

20:35It's a dazzling coup. Piscina's persuaded Walgreens to pay billions to be taken over by Alliance Boots. But as Piscina settles into his new corner office in Deerfield, Illinois, and fills the upper ranks with executives from Alliance Boots, CBS ups its retail game.

21:00In Rhode Island, CVS Pharmacy's 50-year-old president, Helena Foulkes, is getting in the Christmas spirit. She strolls through a CVS aisle packed with festive merchandise, from Santa hats to plastic trees. But there are no shoppers in this CVS, just her and the team who are preparing the chain for the holidays. And that's because it's a hot summer day in 2015, and this CVS is the test store on the company's sprawling corporate campus in Woonsocket. Folks stops next to a display of Christmas stockings. Each stocking has one big letter monogrammed on it. She turns to the holiday decorations buyer.

21:41Are we going to have to carry every letter of the alphabet? No, no, we have data on what letters sell best. It varies by location, but the most popular are S, M, J, and C. Folks moves on, roaming every aisle. In a few months, every CVS will resemble this place. But the real challenge for Folks is how to make up for the loss in tobacco sales. Taking tobacco off its shelves may have helped CVS's pharmacy benefits manager Caremark win new business worth many millions. But it also burned a$2 billion hole in its drugstore sales and reduced foot traffic in stores. So Folks is out to rekindle sales by shifting CVS towards a healthier mix of products.

22:28And those changes are already evident in the mock-up store. The candy aisle is further away from the checkouts, and space is being given to other snacks with a healthier image. The soda bottles that once dominated the coolers are now making way for more water and other less sugary options, which more and more shoppers are moving towards. It's not just in food and drink where the health drive is evident. Even the beauty section gets a makeover, giving prime real estate to cosmetics that claim health benefits. CVS is betting that Americans now want healthier options. But Walgreens isn't eager to take the wager.

23:08Walgreens isn't interested in nudging customers into changing their habits and ways, but it is into hedging its bets. So it sells cigarettes while also offering options to help people stop smoking and balances out the candy bars by adding fresh fruit to stores. But there is one thing the two chains agree on, that bulking up is the best defense against the relentless pressure from profit-squeezing pharmacy benefit managers. In June 2015, CVS spies a new opportunity and lunges for it. From the ABC 15 Live desk and getting brand new details on that mega merger that was just announced, CVS Health will acquire Target pharmacy and clinics.

23:54The deal is worth nearly$2 billion. The deal gives CVS control of the 1 ,600 pharmacy counters inside Target's stores. And it's a win for both companies. Target frees itself from money-losing pharmacies while keeping the shoppers who drop in to get their medication. CVS, meanwhile, gets millions of Target customers and boosts its store count to 9 ,700 pharmacies. And that puts Walgreens behind again. But Walgreens boss Stefano Pesina is about to fix that.

24:34It's October 2015, and Pesina's on an earnings call to Wall Street analysts. And they all want the lowdown about his latest acquisition move. As the analysts listen in, Pessina enthuses about his deal. This is an exciting time for us. Today we're announcing the acquisition of Rite Aid. Pessina's bidding$9 billion in cash to buy 4 ,600 Rite Aid stores. It's a very steep gamble, but he expects it will pay off. The deal would catapult Walgreens ahead of CVS again and unlock efficiencies that help Walgreens counteract the dwindling prescription drug profits. But the analysts on the line see trouble ahead.

25:17Hi, Stefano. First, congratulations on the Rite Aid acquisitions. But doesn't this open you up to antitrust problems? The question lingers for a moment. Together, Walgreens and Rite Aid will own around 46 % of America's pharmacy market. But Pesina still believes the market's too fragmented. Of course, before we made this decision, we analyzed things very carefully. But, you know, when we have regulators, it's better for us not to comment. But Pessina is confident regulators will approve the acquisition of Rite Aid. The overlap between Rite Aid and Walgreens stores is mainly in a few coastal states like New York and Pennsylvania.

25:59He expects he might have to sell a few Rite Aids there and sees no reason why he can't walk away with most of its stores anyway. But federal regulators are all over this deal from day one. the Federal Trade Commission orders a review of whether the union of Walgreens and Rite Aid will stifle competition. The regulatory pressure on Walgreens is building, and not just for antitrust concerns. Federal regulators also smell trouble with Theranos, the Silicon Valley startup that Walgreens had partnered with to offer rapid blood tests. Walgreens hoped the rapid tests would give it a decisive edge over CVS.

26:39But in early 2016, regulators spot serious problems with the accuracy of Theranos' tests that could endanger patients' health. Indeed, there is blood in the waters. Walgreens severs ties with Theranos and sues the company, only to be sued itself by customers who receive flawed results from Theranos tests conducted at their stores. And while Walgreens struggles to put the Theranos debacle behind it, its battle to get its buyout of Rite Aid approved rumbles on. A year comes and goes without a resolution. To move things along, in January of 2017, Walgreens offers to sell 865 of Rite Aid stores to get the deal through.