December 21, 2011 / 1:10 PM / 7 years ago

Walgreen unlikely to make up with Express Scripts

Dec 21 (Reuters) - Walgreen Co WAG.N still believes it can succeed even if it stops filling prescriptions for Express Scripts Inc ESRX.O on January 1, and its stance suggests that the odds of the drugstore making up with the pharmacy benefits manager before the end of the year are remote.

Walgreen, the largest U.S. drugstore chain, has been battling with Express Scripts since June 21, when Walgreen said the companies could not agree on terms for a new contract.

Even before their old contract expires, Walgreen’s decision to part ways with Express Scripts cost it a penny per share in pharmacy sales in the first quarter, and another penny per share in expenses, the company said on Wednesday.

Those costs, along with lower reimbursement rates and margins, led to an unexpected drop in quarterly profit.

Now, Walgreen is “moving on” after it made what Chief Executive Greg Wasson called “another serious attempt” to reach a deal last week, days before the contract expires on December 31.

Its shares fell as much as 8 percent, then recovered a bit and were down about 1 percent at $33.31 in afternoon trading.

Walgreen, armed with fresh survey data, said that many Express Scripts clients want to keep filling prescriptions at its stores.

Walgreen and Express Scripts appear unlikely to reach a deal by the end of the year. Even if they make amends in early 2012, as some expect, patients will already be taking their prescriptions elsewhere, dragging potentially billions of dollars in revenue away from Walgreen and putting it in the hands of its competitors, such as Caremark Corp (CVS.N).

“We remain concerned that patients could develop new buying habits as they are forced to move away from (Walgreens) to other retailers if no deal is reached,” said Lazard Capital Markets analyst Tom Gallucci, who noted that once they take their prescriptions elsewhere, not all patients will come back to Walgreen even if they get the opportunity to do so.

Walgreen said it remains open to any fair and competitive offer from Express Scripts, which contends that it would only keep Walgreen in its network at rates and terms that it believes are right for its clients.

Walgreen, seeking to downplay the potential impact of the dispute on its business, has been trying to show the strength of its massive network of more than 7,810 pharmacies.

It said that more than 100 health plans, employers and various Express Scripts clients told it they either had changed PBMs or made sure patients would still have access to Walgreens pharmacies in 2012.

However, as health-care costs rise, employers and other contract managers are doing whatever they can to control spending.

“The market is moving in a direction that at this point is away from Walgreen’s core strengths,” said Scott Mushkin, an analyst at Jefferies & Co.

Meanwhile, CVS is showing that its decision to combine its thousands of drugstores with a pharmacy benefits management business in 2007 was expected to turn into a profitable success next year, as more companies choose its services.

While Walgreen has some partnerships, it cannot go out and negotiate prescription contracts like others such as CVS can, Mushkin said.

“Their strategic positioning appears to be a little bit off,” he said. “One solution would be to beef up their retail market share.”

Walgreen has used acquisitions to add to its store count before, most notably buying the Duane Reade chain in 2010.

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