Most investors see little difference between CVS Health (NYSE:CVS) and Walgreens Boots Alliance (NYSE:WBA) in the health care market. That is, two pharmacy operators with strong retail brick-and-mortar presence battling it out across the country. Even the charts for CVS stock and WBA shares share similar patterns.
But don’t be fooled; these are increasingly two very different companies, with two very different strategies for succeeding in the hyper-competitive U.S. health marketplace. CVS Health is buying markets while Walgreens is trying to win customers through partnerships.
This was made starkly evident this Thanksgiving as CVS Health prepared to complete its $69 billion acquisition of Aetna (NYSE:AET), the country’s fourth-largest commercial health insurance company, while Walgreen’s was readying an equity swap with Humana (NYSE:HUM), the third-largest in health insurer.
The point for investors should be clear. Stop looking at CVS and Walgreens as retailers. Look at them as health care providers.
CVS Wants to Own the Customer…
With Aetna, CVS will pursue a new business model, seeking to control costs and guaranteeing itself an income stream.
Aetna, which insures more than 22 million people, reported net income of $1 billion, or $3.03 per share fully diluted, on revenue of $15.4 billion, for the September quarter as it shifted from providing health insurance on Obamacare exchanges to selling Medicare Advantage plans. For the same period CVS Health reported net income of $1.28 billion, or $1.26 per share, and revenue of $46.2 billion.
In addition to its drug stores, CVS Health has Minute Clinics providing primary care and Caremark, a pharmacy benefits manager that negotiates prices on drugs. These give Aetna greater control over health care costs. CVS’s convenient pharmacies could help Aetna sell more Medicare Advantage policies to seniors. CVS has nearly 24% of the retail pharmacy market.
…While Walgreens Wants to Rent
Walgreens, which has 15.6% of the market, as well as a global network of more than 4,700 pharmacies, hopes to replicate CVS’ benefits on the cheap through its deal with Humana, where an equity swap could give it some of the same benefits CVS is getting in buying Aetna.
Walgreens, which had net income of $1.51 billion, $1.55 per share, on revenue of $33.4 billion for the three months ending in August, generally has a more customer-centric strategy, in keeping with the fact that in many countries, costs are controlled by government rather than any private entity.
Walgreens is testing an arrangement with Kroger (NYSE:KR) for grocery pick-up at some of its pharmacies. It is selling Birchbox beauty products in its stores, and putting LabCorp medical testing labs into 600 of them. This is in addition to its 370 primary care clinics.
Walgreens’ strategy is to sell consumers on convenience, with broad product offerings, at a low cost of capital.
The two strategies are aimed at two new giants in the pharmacy space, Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN), which are trying to lower their own health care costs and possibly replace the drug chains.
Walmart, which has 5% of the pharmacy market, is looking into accountable care organizations in 10 markets, like a tie-up signed recently with Louisiana’s Ochsner Health System. Accountable Care locks Medicare patients into networks of doctors and clinics, so the people paying the bills have control over their size.
Amazon, of course, bought online pharmacy Pillpack in July and has launched a venture with JPMorgan Chase (NYSE:JPM) and Berkshire Hathaway (NYSE:BRK.A) to insure their combined 1 million employees and provide more accountability.
The aim in all these cases is to make those who deliver drugs and care accountable to companies that pay the bills, to put a thumb down on the cost scale through the right to say “no” to expensive treatments.
CVS Health has rushed into this new world while Walgreens is still focused on customer convenience. Unless, that is, Walgreens decides to buy Humana.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.