Walgreen profit jumps, shares fall on deal concern
Shares of Walgreen Co. tumbled Tuesday, as investor concerns over the fate of a multibillion-dollar contract outweighed a jump in the drugstore operator's fiscal fourth-quarter earnings.
The Deerfield, Ill., company said Tuesday morning there has been no substantive progress in contract renewal negotiations with Express Scripts Inc., and company officials later told analysts the two sides remain "miles apart."
Walgreen said in June that it was ending a $5.3-billion-per-year relationship with Express Scripts Inc. Walgreen said that the St. Louis company was not paying it enough money to fill prescriptions. It also complained that Express Scripts was trying to dictate terms of the partnership.
Pharmacy benefits managers, or PBMs, like Express Scripts pay Walgreen to fill prescriptions. The PBMs make money by reducing the costs in prescription drug plans. Walgreen had a similar contract fight last year with CVS Caremark Corp. that was eventually resolved.
But the Express Scripts conflict intensified earlier this month. Walgreen said it plans to stop filling prescriptions managed by Express Scripts Inc. on Jan. 1. Express Scripts then announced that it was suing Walgreen.
Walgreen CEO Greg Wasson said Tuesday his company believes it deserves fair value, and "we don't see any reason to give any PBM a substantially better deal than all the others without having done something to warrant it." He said Walgreen is prepared to move forward in negotiations if Express Scripts wants to provide fair compensation.
"But if not, it's not really a productive place for us to be in our business," he said.
The CEO also said the drugstore chain is talking with companies that pay for benefits about potentially forming a direct relationship with Walgreen instead of going through Express Scripts.
Walgreen shares fell 6 percent, or $2.17, to $33.86 in afternoon trading while the Dow Jones industrial average climbed more than 2 percent. The price of Walgreen shares has fallen more than 20 percent since the company announced its split with Express Scripts.
Gabelli & Co. analyst Jeff Jonas said Walgreen sounded "very bearish again" on the Express Scripts deal, and he thinks that's the main reason shares fell Tuesday.
"I think they're still talking and both sides are really digging in their heels and negotiating publicly," he said.
Jonas forecasts 2012 earnings of $2.90 per share for Walgreen. He said a failure to reach an agreement with Express Scripts will knock 20 cents off that estimate. Walgreen could lose another 20 cents per share if Express Scripts completes its acquisition of competitor Medco Health Solutions Inc.
In the fiscal fourth quarter, Walgreen earned $792 million, or 87 cents per share. That compares with net income of $470 million, or 49 cents per share, in last year's quarter. Adjusted earnings were 57 cents per share, and that topped Wall Street expectations.
Analysts surveyed by FactSet expected, on average, earnings per share of 55 cents for the quarter.
Revenue climbed more than 6 percent in the quarter to $17.97 billion.
The company recorded an after-tax gain in the quarter of 30 cents per share after completing the sale of its Walgreens Health Initiatives Inc. business.
Sales at stores open at least a year rose 4.4 percent. That's a key indicator of a retailer's long-term health because it excludes stores that recently opened or closed.
Walgreen is the largest drugstore chain in the United States with more than 7,700 stores. For the full fiscal year, the company earned $2.71 billion, or $2.94 per share, on $72.18 billion in revenue.