Walgreen: Storied Franchise Faces Huge Problem

Monday, 09 Jan 2012 07:10 AM

By Dan Weil

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Walgreen (WAG), the country’s largest drugstore chain, represents a storied franchise. But it faces a huge problem: the end, at least for now, of its relationship with pharmacy benefits manager Express Scripts (ESRX).

The two companies can’t agree on how much Express Scripts should reimburse Walgreen for providing drugs to customers in Express Scripts’ network. The two companies split Jan. 1. Walgreen now is trying to convince health plans and employers who have been using Walgreen and are members of Express Scripts to switch to another network.

The effort has been largely unsuccessful. Walgreen said in December that its cajoling has allowed it to keep only about 10 million of the 90 million prescriptions managed by Express Scripts that Walgreen filled in the fiscal year ended Aug. 31. That represents a paltry retention rate of 11.4 percent.

Analysts estimate the loss of Express Scripts will cost Walgreen more than $4 billion of revenue a year. Customers with drug coverage managed by Express Scripts accounted for $5.3 billion, or 7 percent, of Walgreen’s revenue in fiscal 2011.

CVS Caremark (CVS), Walgreen’s chief competitor, says it may gain up to 23 million prescriptions thanks to the Walgreen-Express Scripts imbroglio.

Walgreen says it’s still open to reaching an agreement with the benefits manager. And if it wants a successful future, Walgreen would be wise to do so.

Profit drop

Walgreen profit fell 4 percent in the quarter ended Nov. 30 to $554 million from $580 million a year earlier. Revenue gained 5 percent to $18.2 billion.

Standard & Poor’s analyst Joseph Agnese nevertheless has a four-star buy rating on Walgreen shares. He believes the company will repair its relationship with Express Scripts early this year, limiting any negative fallout.

Walgreen’s stock price has dropped more than 30 percent since it announced its breakup with Express Scripts, and Agnese expects the dispute will continue to weigh on the share price. He has a 12-month price target of $36, up 9 percent from recent levels.

The company next reports earnings March 21.

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