Express Scripts, Walgreen settle pharmacy spat

Thu Jul 19, 2012 4:58pm EDT

(Reuters) - Walgreen Co will soon be able to fill prescriptions for Express Scripts Holding Co patients after the two corporate giants settled their long-running dispute, removing a concern that has weighed on the drugstore chain's shares for a year.

Walgreen, the largest U.S. drugstore chain, will be part of the broadest network of drugstores available to clients of pharmacy benefit manager Express Scripts, as of September 15, the companies said on Thursday.

Walgreen's sales have suffered since it stopped filling prescriptions for consumers with Express Scripts coverage at the end of 2011 due to a contract dispute between the companies. Express Scripts has gained even more scale due to its recent acquisition of rival Medco.

While the new multi-year agreement brings Walgreen and Express Scripts back together, it is not clear how many of Express Scripts' clients will sign up for the broad network that will include Walgreen. Also, it is unclear what Walgreen will do to entice patients who have filled prescriptions elsewhere since the beginning of 2012 to return to its 7,907 U.S. stores.

Shares of Walgreen jumped 11.8 percent following the announcement, while Express Scripts shares rose 1.1 percent. Shares of Walgreen are still about 23 percent below their price on June 20, 2011, the day before it said it planned to leave Express Scripts' network after unsuccessful contract talks.

"I think Walgreens completely had miscalculated how this was going to impact their business and they just were getting no traction in keeping scripts in house," said David Heupel, healthcare analyst with Thrivent Investment Management.

Walgreen estimated that leaving Express Scripts' network would wipe about $5.3 billion in annual sales from its books. Since January, its sales at existing stores have fallen every month. Quarterly profits have also suffered due to the impasse.

There was also the possibility that talks about Walgreen's contract with Medco, which is now owned by Express Scripts, would have added more pressure on Walgreen, analysts said.

"The deal also alleviates renewal fears concerning WAG's upcoming contract with Medco ... that expires Dec 31," S&P Capital IQ analyst Herman Saftlas said.

Pharmacy benefits managers, or PBMs, such as Express Scripts administer drug benefits for employers and health plans and run large mail order pharmacies.

When Walgreens stores stopped filling prescriptions for Express Scripts patients, rival drugstores such as CVS gained some of that business.

"Ultimately, the magnitude and timing of the impact on our financial results of rejoining the Express Scripts retail pharmacy provider network will depend on our ability to regain former patients and attract new patients covered by existing and new Express Scripts clients," Walgreen said in a regulatory filing.

The rift had less of an impact on Express Scripts. In its first-quarter earnings report in May, Express Scripts said it retained 97 percent of its clients despite losing Walgreen from the network.

NEXT STEPS

Now it is up to Express Scripts clients, such as employers, to decide whether to include Walgreen in their networks going forward. Express Scripts does not disclose how many of its clients are in each type of network it offers.

"We believe a number of plan sponsors have already signed narrow network agreements that exclude Walgreens, which will remain in place," JP Morgan analyst Lisa Gill said in a research note.

The broadest retail network is believed to represent close to 90 percent of Express Scripts' total customer base, according to Barclays Capital analyst Lawrence Marsh.

The broadest Express Scripts network will now offer more than 64,000 pharmacies nationwide, including Walgreens, the companies said.

Shares of CVS Caremark Corp, a rival drugstore chain and pharmacy benefit manager, fell 6.2 percent. CVS said it expects to keep at least half of the business it gained during the nine month dispute between its rivals.

While CVS shares "will naturally experience some profit-taking on the news," its outlook remains sound, said Lazard Capital Markets analyst Tom Gallucci, who has "buy" ratings on CVS and Express Scripts.

Meanwhile, shares of Rite Aid Corp, the No. 3 U.S. drugstore behind Walgreen and CVS, dropped 6.3 percent.

In May, CVS raised its full-year profit forecast due in part to its success in winning over former patrons of Walgreen and its chief executive said that the boost from his rivals' fallout could be long lasting.

"The longer the impasse lasts, the stickier that customer is going to be," CVS CEO Larry Merlo said in May. "They're going to have an opportunity to visit a CVS multiple times and begin to establish a relationship with the CVS pharmacists."

CVS expects to retain at least 50 percent of the business it gains during the impasse and said it should add about 5 cents per share to its profit in the second half of 2012.

During the dispute with Express Scripts, Walgreen looked for other growth opportunities. It is expanding outside the United States into Europe, taking a stake in health and beauty group Alliance Boots Holding Ltd. Walgreen is also set to pay $438 million to buy small U.S. chains such as USA Drug.

(Reporting by Lewis Krauskopf in New York and Jessica Wohl in Chicago; Editing by Gerald E. McCormick, Bernadette Baum, Sofina Mirza-Reid, Andrew Hay, Gary Hill)

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