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Walgreen says Express Scripts talks are stalled

Tue, 09/06/2011 - 9:45am
MARLEY SEAMAN - AP Health Writer - Associated Press

Drugstore chain Walgreen Co. reiterated Tuesday that it plans to stop filling prescriptions managed by Express Scripts Inc. on Jan. 1, saying contract renewal negotiations between the companies are stalled.

Walgreen, which is the largest drugstore chain in the U.S., said it has offered a number of concessions to Express Scripts that would keep the rate of prescription reimbursement increased at about 2 percent per year for the next three years. However it said the companies are not making progress in negotiations, and the company said it is informing clients that it won't be part of Express Scripts' networks. Walgreen will lose about $5.3 billion in annual revenue if the companies stop doing business.

Walgreen's update was its first since it announced the split with Express Scripts June 21.

Express Scripts, based in St. Louis, is one of the country's largest pharmacy benefits managers. It pays drugstores like Walgreen to fill prescriptions, and makes money by reducing the costs in prescription drug plans. Walgreen said in June that Express Scripts wants to cut the amount it pays to Walgreen and that Express Scripts wanted too much control over other aspects of their relationship. Express Scripts said Walgreen is paid more money than other pharmacies and that it does not want to change other terms of their contract.

In a note to clients last month, Barclays Capital analyst Meredith Adler said investors are not recognizing how much Walgreen stands to lose if it does not come to terms with Express Scripts. Adler said Walgreen's annual profit could fall by 46 cents per share if the companies stop doing business together, and if Express Scripts is able to complete its announced merger with rival Medco Health Solutions Inc., Walgreen would probably lose that business, too. She estimated that would cut its profit by 85 cents per share.

Walgreen of Deerfield, Ill., also reported its August sales on Tuesday. The company said its total revenue rose 7.8 percent to $6.1 billion from $5.66 billion a year ago. Pharmacy revenue grew 7.6 percent, and revenue from "front-end" items like cosmetics and food increased 6.8 percent. Walgreen started administering seasonal flu shots on Aug. 8, and said it had given more than 300,000 inoculations by the end of the month.

Walgreen said revenue from stores open at least a year grew 5.6 percent. Sales at stores open at least a year is considered an important measurement of retailer health because it excludes results from stores that have opened or closed within the last year. The result was a bit better than analysts expected, as Thomson Reuters says analysts expected an increase of 5.3 percent, on average.

At stores open at least a year, pharmacy revenue increased 6.1 percent and the company filled 5.2 percent more prescriptions than a year ago. Front-end revenue rose 4.8 percent. Walgreen said customer traffic rose 2.5 percent, and shoppers spent 2.3 percent more, on average. The company said Hurricane Irene didn't have a significant effect on its sales.

Analysts expected pharmacy revenue to rise 4.8 percent and front-end revenue to rise 4.6 percent.

The company operated 7,760 stores at the end of August, 199 more than a year ago. Its biggest competitor, CVS Caremark Corp., has about 7,300 stores.

Aug. 31 was the end of Walgreen's fiscal fourth quarter. The company said its total sales rose 6.4 percent to $17.94 billion from $16.87 billion. Sales at stores open at least a year rose 4.3 percent, with pharmacy revenue up 4.2 percent and front-end revenue rising by 4.7 percent

Analysts expect Walgreen to total revenue of $17.85 billion in the fiscal fourth quarter, according to estimates compiled by FactSet.

Shares of Walgreen fell 48 cents to $34.29 as the markets dipped in midday trading.

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