Impasse Hurts Walgreen's Quarter

Walgreen (NYSE: WAG  ) saw fiscal fourth-quarter earnings jump a whopping 69%, helped by the sale of its pharmacy benefits management (PBM) business. This was also the fifth straight quarter in which the drug retailer saw its earnings per share grow by double digits. But shares plunged after the news. Why?

Walgreen and Express Scripts (Nasdaq: ESRX  ) were locked in an impasse back in June over what Express was paying Walgreen for prescriptions. Walgreen didn't like the terms Express had offered regarding prescription reimbursements, so it decided to terminate their contract effective January 2012. The fallout sent Walgreen's shares plunging.  

This rift could be damaging to Walgreen's growth, especially as Express looks to become the largest PBM provider in the U.S. after agreeing to buy Medco Health Solutions (NYSE: MHS  ) . Together, they would control roughly one-third of the market, so Walgreen stands to lose a major chunk of the PBM pie. However, the deal isn't inked yet, as concerns that a merger may lead to higher prices continue to mount. And there is reason to doubt that this deal will advance. It's reminiscent of the 2006 attempted merger between Express Scripts and CVS Caremark (NYSE: CVS  ) , which the FTC rejected on antitrust concerns.

To offset the loss of Express Scripts, Walgreen is working directly with a host of health plans and employers (it refused to reveal names). It also acquired drugstore.com, which brings in 3 million customers and adds nearly 60,000 online products to Walgreen's portfolio.

Year-over-year quarterly revenues rose 7% to $17.96 billion as Walgreen's stores saw improved foot traffic and sales per customer. Comparable-store sales rose by 4.4%, higher than what rivals Rite Aid (NYSE: RAD  ) and CVS achieved during their latest quarters. Walgreen's quarterly net income of $792.0 million well outpaced the same period last year.

The Foolish bottom line
Though Walgreen is putting up good numbers and planning ahead, I doubt that it will be able to make up for the revenue loss from the Express Scripts split. Walgreen, after all, did warn Wall Street that it will lose more than $3 billion in revenue in fiscal 2012. To stay up to date on what Walgreen does to compensate for Express' loss, add Walgreen to your stock Watchlist.  

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of MedcoHealth Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 09, 2011, at 7:41 PM, JBKirtley wrote:

    Wag posted $17.96 billion in annual revenues. ESRX tendered a $29 billion offer for Medco. If the PBM controls less than 33% of the market and its reason for existence is to lower costs, something seems to be out of balance. WAG management has exhibited sound judgment in declining the ESRX offer of reduced reimbursement for their services. On the other hand, ESRX management seems to be selling out its customers to cover its appetite for spending. ESRX doesn't have much of an argument against WAG's profits when they earn much more for serving many less.

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