* Walgreen to be back in Express Scripts network in Sept.
* Deal ends dispute that became public in June 2011
* Walgreen shares jump 10.8 pct, Express Scripts up 2.7 pct
(Adds Walgreen comment, paragraph 12)
By Lewis Krauskopf and Jessica Wohl
July 19 (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 Sept. 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)
