Walgreen balks, walks away from Express Scripts
CHICAGO (Reuters) - Drugstore operator Walgreen Co said it will stop filling prescriptions for people covered by drug benefits manager Express Scripts Inc at the end of the year after failing to agree on new contract terms, a year after it fought a similar battle with CVS.
At issue are terms under which Express Scripts would pay the largest U.S. drugstore chain for the prescriptions, which were expected to be worth $5.3 billion in sales to Walgreen in 2011. Shares of both companies fell on the news.
Walgreen also balked at Express Scripts wanting to be the one to define which drugs are considered branded drugs and which are considered generic.
Walgreen said it would no longer be part of the Express Scripts network as of January 1, 2012.
The breakup is part of long-running battle over costs in the lucrative market for prescription drugs, a market that is growing as the U.S. population ages.
"We're prepared and ready to live in a world without Express Scripts," Walgreen CEO Greg Wasson said during a conference call with analysts on Tuesday.
Walgreen's move appears to be "public posturing," Jefferies & Co analyst Arthur Henderson wrote in a note to clients.
"The companies are simply too large not to do business with each other," he said, adding that Walgreen and Express Scripts are likely to reach a deal within the next several weeks.
DEJA JUNE
Indeed, Tuesday's announcement is reminiscent of a stare-down Walgreen had last June with CVS Caremark Corp .
After 11 days, Walgreen and CVS -- which runs a large pharmacy benefits business along with its drugstores -- settled a dispute over prescription reimbursements, saving a relationship worth billions of dollars for both companies. Walgreen had been ready to end its arrangement to fill prescriptions for millions of CVS Caremark drug plan members.
Express Scripts said on Tuesday that it was trying to keep prescription drug costs affordable.
"We would prefer that Walgreens participate in our network, but only if its costs are in line with other participating pharmacies," Express Scripts said in a statement.
Walgreen shares were down 6.3 percent at $42.32 in morning trading, while Express Scripts was down 0.75 percent at $54.38.
PROFIT RISES
Prescriptions that Walgreen fills for Express Scripts clients account for about 7 percent of its total sales, the same amount that the CVS Caremark business was worth.
Overall prescription sales make up nearly two-third of Walgreen's revenue, and customers of benefits plans, like Express Scripts, also shop for other goods while they are in a Walgreen's drugstore.
Also on Tuesday, Walgreen said profit rose 30 percent to $603 million, or 65 cents per share, in its fiscal third quarter which ended on May 31, from $463 million, or 47 cents per share, a year earlier. The profit, which was helped by a lower tax rate, topped analysts' forecast by 2 cents per share, according to Thomson Reuters I/B/E/S.
Walgreen again said it faced continued pressure as government agencies cut back on prescription drug payments.
Under the Medicaid program, U.S. states and the federal government pay for a large portion of medical care, including drugs, for lower-income Americans. Those agencies have been reducing how much they pay as they try to balance budgets.
Walgreen's prescription sales at drugstores open at least a year rose 4.1 percent. The company filled 210 million prescriptions, up 5.8 percent over last year's third quarter.
Quarterly sales rose 6.8 percent to $18.37 billion. As previously reported, same-store sales rose 4.1 percent.
During the quarter, Walgreen sold its own pharmacy benefits management unit. The company, which is still updating its stores and selling more food and private label goods, also bought drugstore.com inc as it tries to grow online.
(Additional reporting by Phil Wahba and Lewis Krauskopf in New York; writing by Brad Dorfman in Chicago; Editing by Derek Caney, John Wallace and Matthew Lewis)