Walgreen declines after split with Express Scripts on contract

Posted 6/21/11

ATLANTA - Walgreen Co., the largest U.S. drugstore chain, fell the most in three months in New York after failing to renew a contract with benefits manager Express Scripts Inc., valued at more than $5 billion in annual sales.

The agreement, which ends as of Jan. 1, collapsed partly because Express Scripts wanted to cut reimbursement rates to “unacceptable levels,” Walgreen said Tuesday. St. Louis-based Express Scripts responded that it’s "prepared" for a pharmacy network without Walgreen, now its largest retailer, and that the change will have little impact on patients.

The Express Scripts partnership would account for about 7 percent of Walgreen’s $72 billion in sales this year, according to the average of estimates compiled by Bloomberg. The chain is vying with CVS Caremark Corp. and Rite Aid Corp. for consumers hurt by the increasing jobless rate and fuel costs.

Walgreen’s announcement “appears to be more public posturing than legitimate circumstance as we believe it is in the best interest of both companies to come to terms on this issue,” Arthur Henderson, an analyst with Jefferies & Co. in Nashville, said Tuesday in a note. "An eventual deal with Walgreen seems likely."

Walgreen, based in Deerfield, Ill., fell $2.81, or 6.2 percent, $42.37 at 9:40 a.m. in New York Stock Exchange composite trading, the most in intraday trading since March 22.

Express Scripts, the third-biggest pharmacy benefits manager behind CVS Caremark and Medco Health Solutions Inc., fell as much as 3.3 percent.

Many Choices

"We would prefer that Walgreens participate in our network, but only if its costs are in line with other participating pharmacies," David Whitrap, a spokesman for Express Scripts, said today in an emailed statement. The company has more than 60,000 pharmacies in its network, giving customers ample choice, he said.

Walgreen also said today third-quarter profit rose to 65 cents a share, compared with the 63-cent average of estimates compiled by Bloomberg. Net income in the quarter surged 30 percent to $603 million from $463 million, or 47 cents a share, a year earlier.

“The long-term ramifications of accepting Express Scripts’ proposal with below market rates and minimal predictability for the services we provide would have been much worse than any short-term impact to our earnings,” Walgreen Chief Financial Officer Wade Miquelon said in the statement.

Third-quarter sales climbed 6.8 percent to $18.4 billion in the period ended May 31. Prescription sales, which make up almost two-thirds of total revenue, advanced 6.4 percent.

The shares dropped the most in more than two years in March, after profit failed to improve as much as some analysts’ anticipated. Walgreen said rising commodity costs, including fuel, ate into earnings.

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