2nd UPDATE: Walgreen, Express Scripts In Drug Benefit Spat
22 June 2011 - 2:57AM
Dow Jones News
Drugstore giant Walgreen Co. (WAG) and pharmacy-benefit
heavyweight Express Scripts Inc. (ESRX) said Tuesday that
contract-renewal talks have broken down in their
multibillion-dollar relationship, potentially sending millions of
Americans elsewhere to fill their prescriptions.
Provided talks aren't resuscitated, the companies plan to sever
ties starting Jan. 1. Walgreen said dropping out of Express
Scripts' pharmacy provider network could cost it about $5.3 billion
in annual sales, or nearly 8% of its total. Express Scripts is
unlikely to feel any immediate pain because its customer contracts
are mostly locked in; however, not having a relationship with the
nation's largest drugstore could weaken its ability to negotiate
future agreements.
The stalemate comes as health-care companies prepare their
businesses for the further integration of the U.S. health-care
overhaul law passed last year. The law, in part, sought to contain
rising medical costs but has contributed to rising tensions in the
health industry as companies work to adjust to the new
regulations.
The dispute also is the latest one between a drugstore and
pharmacy benefit manager, two groups that are increasingly becoming
rivals. PBMs handle prescription-drug benefits and claims for
employers and health-insurer clients; in the past, they have worked
with drugstores to secure deals for their members. Now, though,
PBMs increasingly are operating their own mail-order pharmacies
that compete more directly with drugstores.
Walgreen, which also reported a 30% increase in third-quarter
earnings Tuesday, said the long-term fallout from accepting
unfavorable terms with Express Scripts would be worse than any
short-term earnings impact, which the company didn't spell out.
The drugstore chain cited terms that it said made it difficult
to plan business operations. These included Express Scripts
insisting it can "unilaterally define contract terms," such as what
does and doesn't constitute a generic drug, and the PBM rejecting
Walgreen's request for advance notice before changes to
prescription drug plans, Walgreen said.
The Deerfield, Ill., company "no longer felt like a valued
partner" of Express Scripts and made a "very clear, principled
decision" about ending negotiations, Walgreen Chief Executive Greg
Wasson told analysts on the company's conference call.
Express Scripts, meanwhile, said it's prepared for a network
without Walgreen. The St. Louis company noted that its network
includes more than 60,000 pharmacies and said it sees "minimal
impact to member convenience."
"We would prefer that Walgreens participate in our network, but
only if its costs are in line with other participating pharmacies,"
Express Scripts spokesman David Whitrap said in an emailed
statement. The company processes about 90 million prescriptions
that are expected to be filled by Walgreen in fiscal 2011.
Walgreen's Wasson left open the possibility the two parties
could eventually reach a deal, and history suggests that could
happen. Walgreen got into a public spat over reimbursement rates
and other issues a year ago with CVS Caremark Corp. (CVS), a rival
drug-store operator that also has a pharmacy benefit business.
Although the relationship appeared in jeopardy, the companies
reached a new agreement for undisclosed terms that kept Walgreen
pharmacies in the CVS Caremark pharmacy benefit network.
Any disruption is seen affecting Walgreen more. "Walgreen has
much more to lose on a relative basis than Express Scripts does,"
said Constantine Davides, analyst at JMP Securities. Express
Scripts has less immediately at stake, analysts say, because its
customers can fill their prescriptions elsewhere.
The different concerns were reflected in how the stocks were
reacting Tuesday. Walgreen shares slid 5.3% to $42.79, while
Express Scripts shares declined 22 cents to $55.01.
Meanwhile, shares of CVS--which is the second-largest drug store
chain after Walgreen and operator of the Caremark PBM
business--recently rose 1.4% to $38. Shares of another PBM, Medco
Health Solutions Inc. (MHS), added 1.4% to $56.07.
For the third quarter ended May 31, Walgreen reported a profit
of $603 million, or 65 cents a share, up from $463 million, or 47
cents a share, a year earlier. The latest quarter included a penny
in restructuring-related charges, and analysts polled by Thomson
Reuters had forecast per-share earnings of 63 cents in the recent
quarter.
Sales improved by 6.8% to $18.37 billion, with same-store sales
rising by 4.1%, including 3.9% growth in the front of the store and
a 4.1% increase in the pharmacy.
Wasson said the company continues to face economic and
regulatory uncertainty, and both commercial and governmental
reimbursement pressure. Plus, there are inflationary pressures, but
Wasson said Walgreen is closely monitoring its competition to try
to get the best margin without losing customer traffic.
-By Maxwell Murphy and Jon Kamp, Dow Jones Newswires;
212-416-2171; maxwell.murphy@dowjones.com
--Tess Stynes contributed to this article.
Medco (NYSE:MHS)
Historical Stock Chart
From Jun 2024 to Jul 2024
Medco (NYSE:MHS)
Historical Stock Chart
From Jul 2023 to Jul 2024