Without Walgreen Company (WAG) You Are Missing Health Care’s Transformation

The reason is in the name. Caremark is a Pharmacy Benefit Manager, or PBM. It competes with ExpressScripts, but it’s also tied closely to the older fee-for-service health model that health reform challenges directly. If CVS were as aggressive as Walgreens, in other words, Caremark might suffer.

Last year, the Caremark drag was a Caremark boost, as CVS benefitted from Walgreens’ spat with ExpressScripts. The two finally made peace in the middle of the year, and since then Walgreens has outperformed CVS by a margin of 3-1, rising 60% against CVS’ 20%.

CVS Caremark Corporation (NYSE:CVS) stores are far more traditional than those of Walgreen Company (NYSE:WAG). They feature general merchandise in a well-lit space with a pharmacist on one end. The idea always was that people would bring in doctors’ prescriptions, and shop while having them filled. But this model has long been under threat from grocery stores like Kroger and discounters like Wal-Mart, which can offer aggressive pricing on the prescriptions and more shopping.

CVS, in other words, is boxed-in between a model facing increased competition and its ties to traditional medicine, which so far are keeping it from moving against Walgreens aggressively. It has to recognize that’s a problem, then find a way to address it – perhaps by selling or spinning-off Caremark – before the relative performance of these two stocks will change.

My Foolish Take

If you believe the health reform law is not going to be repealed, which whatever your politics is the way to bet, then Walgreens remains better positioned than CVS to take advantage and remains a better investment. A move by CVS to address its problems decisively is the only thing that would change my view of this.

The article Without Walgreens You Are Missing Health Care’s Transformation originally appeared on Fool.com and is written by Dana Blankenhorn.

Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dana is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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