September 30, 2014 / 12:45 PM / 5 years ago

UPDATE 2-Higher generic drug prices, lower reimbursements to hurt Walgreen margins

(Adds details from conference call, updates shares)

Sept 30 (Reuters) - U.S. drugstore chain Walgreen Co said lower insurer payments for prescriptions amid increased competition, and a rise in generic drug prices would continue to hurt margins in the current quarter, pressing its shares.

Rival Rite Aid Corp also warned about margins due to increased competition in the Medicare Part D prescription drug program, which are provided only through private insurance companies.

Pharmacy chains such as Walgreen are contracted with health insurers and others that operate Medicare Part D drug plans.

Rite Aid cut its full-year profit forecast this month for the second time in about three months due to a cut in insurance reimbursement rates and manufacturing delays on new generic versions of drugs that have lost exclusivity.

Pharmacy chains are also facing a pinch as drugmakers increase prices of generic drugs such as heart drug digoxin.

“...For the next quarter we expect the negative factors impacting pharmacy margin to outweigh the expected benefit from new generic introductions and front-end margin improvement,” Walgreen Chief Financial Officer Timothy McLevish said on a conference call.

Walgreen’s shares rose as much as 2.9 percent earlier in the day after it reported its biggest jump in quarterly sales in three years and said it was renegotiating contracts with health insurers to reflect the jump in generic drug prices.

Walgreen’s gross margins shrank to 28 percent from 28.9 percent in the fourth quarter ended Aug. 31.

Walgreen posted a better-than-expected 6.2 percent rise in quarterly sales as prescription sales rose 9.3 percent.

The largest U.S. drug retailer said it filled 211 million prescriptions in the quarter, an increase of 4.2 percent from a year earlier, helped by strong growth in the Medicare Part D plans.

Revenue rose to $19.06 billion.

The Deerfield, Illinois-based company also said it expects to save about $650 million from its acquisition of the remaining stake in Alliance Boots in the full year. The company expects to save $1 billion by 2017.

Walgreens said last month it would pay 3.13 billion pounds in cash and 144.3 million shares for the 55 percent stake in Alliance Boots..

Walgreen said the net loss attributable to it was $239 million, or 25 cents per share, in the quarter. The loss includes an $866 million non-cash loss due to the amendment and exercise of Walgreen’s Alliance Boots call option.

The company said it expected Alliance Boots to add 10 to 11 cents per share to its current-quarter adjusted earnings.

Excluding items, the company earned 74 cents per share in the fourth quarter, with Alliance Boots contributing 6 cents per share.

Analysts on average had expected a profit of 74 cents per share on sales of $19.02 billion, according to Thomson Reuters I/B/E/S.

Walgreen’s shares were down 0.7 percent at $59.18 in late morning trading. (Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Savio D’Souza and Simon Jennings)

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