Walgreen expects to lose most Express Scripts biz

December 29, 2011

Drugstore operator Walgreen Co. said Thursday it expects to lose almost 90 percent of prescriptions handled by pharmacy benefits manager Express Scripts Inc. after it leaves Express Scripts' networks on Jan. 1.

The Deerfield, Ill., company said the break will hurt its sales, earnings and cash flow during fiscal 2012, although it did not specify the impact in a filing with the Securities and Exchange Commission. But it noted that Express Scripts processed about 88 million prescriptions filled by Walgreen in fiscal 2011. That represented about $5.3 billion of the drugstore operator's sales out of $72.18 billion in total sales.

Based on deals it has made with individual Express Scripts clients, Walgreen said it expects about keep about 10 million of those prescriptions. The company said it filled about 26 million prescriptions for Express Scripts over the first four months of its current fiscal year, which started Sept. 1.

Express Scripts pays Walgreen and other drugstore operators to fill prescriptions. The companies have said since June that they were preparing to stop business once their three-year contract ends this year. Walgreen has said it would rather give up the revenue it gets from Express Scripts than continue filling unprofitable prescriptions. When the contract ends, most Express Scripts members won't be able to fill prescriptions at Walgreen stores.

The nation's largest drugstore chain also has said it will try to keep as many of the Express Scripts prescriptions as possible by making its own arrangements with companies and health plans. Walgreen said more than 100 Express Scripts clients have either changed pharmacy benefits managers or altered their contracts to keep Walgreen in their networks. It said it believes that employers and health plan sponsors will want to keep its stores in their networks.

Walgreen has not made deals with Express Scripts' biggest clients, however, including the Tricare military health plan and Indianapolis-based health insurer WellPoint Inc.

In the meantime Walgreen said it will try to counteract the loss of Express Scripts' business by cutting costs. However the company has acknowledged that it will not be able to cut enough costs to make up for all of the revenue it will lose. Walgreen recently completed a three-year initiative that was intended to cut its annual spending by $1 billion.

Walgreen reiterated in the filing Thursday that it expects to keep 97 to 99 percent of its fiscal 2011 prescription volume in the new fiscal year. Walgreen fills one out of every five prescriptions in the U.S., and it filled about 819 million prescriptions in its last fiscal year. The company has approximately 7,800 stores.

Walgreen said earlier this month the Express Scripts decision cost it a penny per share in sales at pharmacies open at least a year and a penny per share in expenses during its fiscal first quarter.

Walgreen acknowledged it could lose more business or face more pressure to cut its prices if Express Scripts is able to buy Medco Health Solutions Inc., one of its biggest pharmacy benefits management competitors. Express Scripts agreed to buy Medco in July for $29.1 billion. Antitrust regulators are reviewing the deal, and the companies hope to complete the sale in the first half of 2012.


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