Walgreen (NYSE:WAG), the leading drugstore chain with 8,400+ locations across the U.S., recently released its November results. The dispute with pharmacy benefits manager (PBM) Express Scripts continued to weigh on the company’s sales as Express Scripts’ customers have already started looking at other drugstores to fill their prescriptions. The stock has lost more than 20% value since June this year in anticipation of the script exodus post December when the contract between Walgreen and Express Scripts expires. Walgreen competes with CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD).
Express Scripts Dispute and Milder Flu Season Weigh on Revenues
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Walgreen’s sales improved 4% in November, but its dispute with the pharmacy benefits manager Express Scripts continued to weigh on the monthly sales after weaker-than-expected sales were reported for October. Total prescriptions filled by the drug retailer grew just by 1.5 percentage points, with 1.1 percentage point negative impact corresponding to Express Scripts. This was higher than the 0.6 percentage point negative impact on prescriptions count related to Express Scripts in October.
Sales were also hurt by a milder flu season and vaccinations this year compared to last year that negatively impacted comparable prescriptions filled by 0.8 percentage point. Walgreen’s November sales increased 4% (y/y) with 4% higher front-end sales and 2.7% higher comparable store front-end sales. Pharmacy sales (accounting for 65% sales) increased 3.4%, while comparable pharmacy sales increased 1.2%, negatively impacted by 2.2 percentage points due to generic drug introductions and by 1.3 percentage points due to lower incidence of cough, cold and flu. The drug retailer opened 31 stores during the period.
The Walgreen-Express Scripts Impasse
Walgreen and Express Scripts (NYSE:ESRX) hit a roadblock this year failing to renew their contract for 2012 which threatens to cost Walgreen a large part of its $5 billion business coming from Express Scripts next year. After the contract ends, most people covered by plans managed by Express Scripts, the second largest PBM in the U.S., will not be able to fill their prescriptions at Walgreen stores. Even though Walgreen is trying to minimize the loss, analysts expect a higher loss in prescriptions, front-end sales and overall profits.
We value Walgreen with a revised $35 Trefis price estimate of its stock, which is at a 5% premium to the current market price.