Walgreen balks, walks away from Express Scripts

CHICAGO/NEW YORK (Reuters) - Walgreen Co said it will stop filling prescriptions for people covered by drug benefits manager Express Scripts Inc at the end of 2011 after failing to agree on new contract terms.

The announcement echoes a similar battle Walgreen settled with CVS Caremark Corp a year ago, and some suggested that the largest U.S. drugstore chain was using its stature as a negotiating tactic.

"These guys are good poker players," said Smead Value Fund portfolio manager Bill Smead. "But by saying January 1, they're really allowing a lot of time to kiss and make up."

Walgreen said it would no longer be part of the Express Scripts network as of January 1, 2012, if it cannot reach a deal.

At issue are terms under which Express Scripts would pay Walgreen for prescriptions, which were expected to be worth $5.3 billion in sales to Walgreen in 2011. Walgreen also balked at Express Scripts wanting to be the one to define which drugs are considered branded drugs and which are considered generic.

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.

"I'm seeing it as a negotiating tactic," said Standard & Poor's Equity Research analyst Joseph Agnese. "There are too many benefits for both companies to not have a deal."

He and other analysts expect the pair to reach an agreement before the end of the year, with some expecting one in weeks.

Walgreen shares were down 5.8 percent at $42.58, while Express Scripts shares were up 0.4 percent at $54.99.

For a graphic with details on Walgreen's Express Scripts business, click here: http://r.reuters.com/tej32s

DEJA JUNE

Tuesday's announcement was 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 cease filling prescriptions for millions of CVS Caremark drug plan members.

"This is literally a replay of the spat with CVS Caremark," said Smead, whose fund has held Walgreen shares for about three years. "Everyone is trying to squeeze blood out of turnips."

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.

CVS declined to comment.

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-thirds of Walgreen's revenue.

PROFIT RISES

Also on Tuesday, Walgreen said profit rose 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.

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 and same-store sales rose 4.1 percent.

During the quarter, Walgreen sold its own pharmacy benefits management unit. It also bought drugstore.com inc as it tries to grow online.

(Additional reporting by Lewis Krauskopf in New York; writing by Brad Dorfman in Chicago; Editing by Derek Caney, John Wallace and Matthew Lewis)