4th UPDATE: Walgreen and Express Scripts Agree to End Rate Impasse
07/19/2012| 05:59pm US/Eastern
--Walgreen's shares soar after company reaches multiyear contract with Express Scripts
--Drugstore retailer will re-enter the pharmacy-benefit manager's network in mid-September
--Walgreen's sales had suffered since exiting the Express Scripts network
(Adds comments from Walgreen, beginning in paragraph 13.)
By John Kell and Jon Kamp
Walgreen Co. (>> Walgreen Company) and pharmacy-benefit manager Express Scripts Holding Co. (>> Express Scripts Holding Co) announced a new multiyear reimbursement agreement Thursday, ending a seven-month dispute that had prevented millions of patients from getting their prescriptions filled at the nation's largest pharmacy chain by store count.
Financial terms of the agreement weren't revealed. The Walgreen chain will become available again to Express Scripts clients as of Sept. 15.
Walgreen had felt the pressure from the dispute more directly than Express Scripts, which is now the largest pharmacy-benefit manager (>> Pacific Booker Minerals Inc.) by number of prescriptions filled. The drugstore saw sales decline and customers leave, and it faced the prospects of more such losses after Express Scripts acquired another PBM, Medco Health Solutions.
In addition, the dispute has generated interest by employers and health plans into deals that include fewer pharmacy options in return for cost savings, raising another threat to Walgreen as Express Scripts shopped this option to Medco clients.
Walgreen declined to comment beyond the press release. Shares of Walgreen surged 12% to $34.62 Thursday, returning to positive territory for the year. Investors were likely relieved that customer attrition could slow, although it was unknown whether the departed clients would return to Walgreen's stores.
Walgreen's same-store sales had suffered each month since the contract expired, preventing patients of drug plans serviced by Express Scripts from getting their prescriptions reimbursed at Walgreen's nearly 8,000 U.S. drugstores.
Shares of Express Scripts gained Thursday, up 1.9% to $58.76. The agreement is well-timed for Express Scripts because it comes during a period of the year in which the company and other PBMs compete for contracts. PBMs handle drug benefits for health plans and corporate clients and strike deals with pharmacies over prescription-reimbursement rates.
Express Scripts executives had said in recent months that the dispute with Walgreen had been better received by customers than expected.
The impact to Walgreen could last longer. Top rival CVS Caremark Corp. (>> CVS Caremark Corporation) said it expects to retain in the fourth quarter at least 50% of the business gained from the impasse and that it sees the dispute adding 5 cents to its per-share earnings in the third and fourth quarters.
A pharmacy customer is "the hardest person to lose, but once you lose them it's the hardest person to win back," CVS CEO Larry Merlo told reporters last month. "The longer this dispute goes on, we believe the stickier the customer will be in terms of the new pharmacy they've chosen."
The dispute also heightened interest in so-called narrow networks, in which PBM clients agree to fewer pharmacy options in return for savings. The impasse showed that losing access to big pharmacy chains didn't have to be disruptive, according to PBM consultants, as there are more than 60,000 retail pharmacies in the U.S.
"We believe a number of plan sponsors have already signed narrow network agreements that exclude Walgreens, which will remain in place," said Lisa Gill, analyst at J.P. Morgan.
For its part, Walgreen said in a filing with the Securities and Exchange Commission that it expects to be part of the networks for most Express Scripts clients, and that it sees marketing and other costs in order to regain former patients and attract new ones.
The drug store also said it expects the dispute to hurt earnings for the current quarter by an amount similar to the previous quarter, which was 6 cents a share.
Morningstar analyst Matthew Coffina said Express Scripts played the dispute "expertly," helped in part by its Medco acquisition. In April, Express Scripts completed its $29.1 billion acquisition of Medco, which combined two of the largest pharmacy-benefits management companies in the U.S. At the time, Express Scripts said Medco clients would still be able to access Walgreen stores.
"Because Express Scripts had the bargaining power here and Walgreen lost so many members, it is most likely Walgreen had to concede to Express Scripts demands than the other way around," Mr. Coffina said.
Walgreen left the Express Scripts network at the beginning of the year after the companies were unable to reach a new deal over reimbursement rates for dispensing prescriptions. Throughout the dispute, Walgreen maintained it should be compensated for its new health-care services that help patients manage their medications, while Express Scripts contended that under Walgreen's initial plan, the company would be the most expensive pharmacy for basically doing the same thing that other pharmacies do.
Walgreen Chief Executive Greg Wasson, who faced criticism from investors and analysts for letting the Express Scripts contract expire, said in a prepared statement that he was pleased the pact works "for both parties and is consistent with our company's principles."
"This agreement is good for our shareholders, our employees and the patients and communities we serve," Mr. Wasson said.
Express Scripts accounted for about 88 million of the 819 million prescriptions filled at Walgreen in the year ended Aug. 31, and represented about $5.3 billion of Walgreen's annual revenue, which was $72.2 billion in fiscal 2011.
Walgreen's sales have suffered since the dispute, despite efforts to retain customers, including a special discount on the annual membership fee for Walgreen's Prescription Savings Club.
After notching same-store sales growth in each month of 2011, sales so far this year deteriorated as demand on the pharmacy side of the business especially suffered. In June, for example, same-store sales dropped 10% as comparable pharmacy sales suffered a 15% decline.
Shares of rival drugstore chains fell on the settlement. CVS slid 6.2% to $45.43, while Rite Aid fell 6.3% to $1.20. Both companies had launched marketing campaigns to court Walgreen's customers during the dispute. Also, the settlement may restrict any gains that CVS's Caremark business could have won during the current selling season for PBM services, which runs through early fall.
Likewise, shares of Catamaran Corp. (>> SXC Health Solutions, Corp.), which recently became the fourth-biggest PBM through the combination of two mid-sized firms, slipped 1.7% to $90.32 in recent trading.
"Express is back at full speed, so to speak," said Dave Shove, analyst with BMO Capital Markets.
Write to John Kell at firstname.lastname@example.org and Jon Kamp at email@example.com
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