If Express-Medco Merge, New Walgreen Deal In The Offing?

by Trefis Team
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Walgreen Co.
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With the strong likelihood that Express Scripts (NYSE:ESRX) – Medco (NYSE:MHS) merger may go through very soon, there is fresh speculation that Walgreen (NYSE:WAG) may enter a new deal with Express Scripts. In fact, UBS expects the deal as soon as April or May and even raised its price target for Walgreen to $39. [1] This would certainly be good news for the Walgreen stock that currently trades at $35, having lost almost a quarter of its value since its impasse with Express Scripts in June 2011. Walgreen competes with CVS Caremark(NYSE:CVS) and Rite Aid (NYSE:RAD).

View our analysis for Walgreen

If Express-Medco Merge, Time To Buy Walgreen Rather Than Sell?

With reports suggesting that ExpressScripts’ acquisition of Medco might go through as early as next week, there have been concerns about implications for Walgreen. The drug retailer walked out of Express Scripts network last year, with disagreements over reimbursement rates, losing over $4 billion worth of business in 2012. There have been added concerns about risks of losing more prescription business with Medco if it merged with Express Scripts. It even fueled speculation that Walgreen could buy Rite Aid.

However, the company’s management indicated in its latest earnings call that it hopes to maintain its relationship and existing long-term contracts with Medco. [2] Now, there are rumors that Walgreen may also enter a fresh deal with Express Scripts, soon. UBS says it could be as soon as April or May. [1] It would certainly be in the interests of both the U.S.’s largest pharmacy services providers and largest drugstore chain to do business with each other. We are watching out for more developments.

How Much Business Does Medco Bring To Walgreen?

In 2011, Medco represented around 125 million prescriptions for Walgreen, compared to 90 million prescriptions associated with Express Scripts. Overall, Walgreen filled close to 716 million prescriptions in 2011, thus Medco and Express making up 17.5% and 12.5% of Walgreen’s prescription market share during the year. The number of Medco prescriptions filled at Walgreen stores is likely to decline to 108 million prescriptions in 2012 and further shrink to 74 million in 2013 as some health plans like United Health Group are expected to migrate out of Medco.

We currently value Walgreen with a $35 Trefis price estimate of its stock, which is about in-line with the current market price.

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Notes:
  1. Walgreen’s Target, Estimates Boosted at UBS (WAG), Dividend.com, March 2012 [] []
  2. Walgreen Sees Flexibility To Keep Medco Clients If Merger Wins Approval, Fox Business, March 2012 []
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