3rd UPDATE: Walgreen, Express Scripts In Drug Benefit Spat
June 21 2011 - 3:43PM
Dow Jones News
NEW YORK (Dow Jones)--Drug-store giant Walgreen Co. (WAG) and
pharmacy-benefit heavyweight Express Scripts Inc. (ESRX) said
Tuesday that contract-renewal talks have broken down in their
multibillion-dollar relationship, potentially sending millions of
Americans elsewhere to have their prescriptions filled.
Provided that talks aren't resuscitated, the companies plan to
sever ties starting Jan. 1. Walgreen said dropping out of Express
Scripts' pharmacy provider network could cost it about $5.3 billion
in annual sales, nearly 8% of its total. Express Scripts is
unlikely to feel any immediate pain because its customer contracts
are mostly locked in; however, not having a relationship with the
nation's largest drug-store chain could weaken its ability to
negotiate future agreements.
The stalemate comes as health-care companies prepare their
businesses for the further integration of the U.S. health-care
overhaul law passed last year. The law, in part, sought to contain
rising medical costs but has contributed to rising tensions in the
health industry as companies work to adjust to the new
regulations.
The dispute also is the latest one between a drug store and
pharmacy benefit manager, two groups that are increasingly becoming
rivals. PBMs handle prescription-drug benefits and claims for
employers and health-insurer clients; in the past, they have worked
with drug stores to secure deals for their members. Now, though,
PBMs increasingly are operating their own mail-order pharmacies
that compete more directly with drug stores.
Walgreen, which also reported a 30% increase in third-quarter
earnings Tuesday, said the long-term fallout from accepting
unfavorable terms with Express Scripts would be worse than any
short-term earnings impact, which the company didn't spell out.
The Deerfield, Ill., drug-store chain "no longer felt like a
valued partner" of Express Scripts and made a "very clear,
principled decision" about ending negotiations, Walgreen Chief
Executive Greg Wasson told analysts during the company's conference
call.
Walgreen cited terms that it said made it difficult to plan
business operations. These included Express Scripts insisting it
can "unilaterally define contract terms," such as what does and
doesn't constitute a generic drug, and the PBM rejecting Walgreen's
request for advance notice before changes to prescription drug
plans, Walgreen said.
Express Scripts, meanwhile, said it isn't seeking any changes to
the current contract terms, including the definitions of branded
and generic medicines. The PBM also argued that the drug-store
chain isn't adjusting its rates to reflect the expected increase in
usage of generic drugs.
"Under Walgreens' current proposal, the added cost burden to our
clients would result directly in profits to Walgreens," Express
Scripts said, noting that, under Walgreen's plan, Medicare
prescriptions would cost the federal government an additional $300
million.
The St. Louis company added that it is prepared for a network
without Walgreen, noting that it sees "minimal impact to member
convenience" because another pharmacy within the network is within
one-half mile of a Walgreen pharmacy. Walgreen is expected to fill
about 90 million prescriptions processed by Express Scripts in
fiscal 2011.
Express Scripts said it remains open to continued negotiations
with Walgreen. "It is shocking to us that Walgreens would back away
from the table with six months to go in the current agreement,"
said Express Scripts Chairman and CEO George Paz.
Walgreen CEO Wasson also left open the possibility that the two
parties could eventually reach a deal, and history suggests that
could happen. Walgreen got into a public spat over reimbursement
rates and other issues a year ago with CVS Caremark Corp. (CVS), a
rival drug-store operator that also has a pharmacy benefit
business. Although the relationship appeared in jeopardy, the
companies reached a new agreement for undisclosed terms that kept
Walgreen pharmacies in the CVS network.
Any disruption is seen affecting Walgreen more. "Walgreen has
much more to lose on a relative basis than Express Scripts does,"
said Constantine Davides, analyst at JMP Securities. Express
Scripts has less at stake immediately, analysts said, because its
customers can fill their prescriptions elsewhere.
The different concerns were reflected in how the stocks were
reacting Tuesday. Walgreen shares slid 4% to $43.38, while Express
Scripts shares added 20 cents to $54.99.
Meanwhile, shares of CVS--which is the second-largest drug-store
chain after Walgreen and operator of the Caremark PBM
business--recently rose 1% to $37.87. Shares of another PBM, Medco
Health Solutions Inc. (MHS), added 1.5% to $56.10.
For the third quarter ended May 31, Walgreen reported a profit
of $603 million, or 65 cents a share, up from $463 million, or 47
cents a share, a year earlier. The latest quarter included
restructuring-related charges of 1 cent; analysts polled by Thomson
Reuters had forecast per-share earnings of 63 cents in the recent
quarter.
Sales improved by 6.8% to $18.37 billion, with same-store sales
rising by 4.1%, including 3.9% growth in the front of the store and
a 4.1% increase in the pharmacy.
Wasson said the company continues to face economic and
regulatory uncertainty, and both commercial and governmental
reimbursement pressure. Plus, there are inflationary pressures, but
Wasson said Walgreen is closely monitoring its competition to try
to get the best margin without losing customer traffic.
-By Jon Kamp and Maxwell Murphy, Dow Jones Newswires;
617-654-6728; jon.kamp@dowjones.com
--Tess Stynes contributed to this article.
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