Walgreen (NYSE:WAG) announced its Q2 results last week. The earnings beat analyst expectations even though the number of prescriptions filled at comparable stores fell by 8-9% as a result of the drug retailer walking out of Express Scripts network this year. What is generating more curiosity is the future of Walgreen’s business with Medco now that the FTC has approved the Express Scripts-Medco deal.
The company’s management indicated in its latest earnings call that it hopes to maintain its relationship and contracts with Medco. Others speculate that Walgreen may hammer out a fresh deal with Express Scripts soon. This certainly bodes well for WAG stock which currently trades at $35, and has 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).
If Express-Medco Merge, Is It Time To Buy Or Sell Walgreen?
Walgreen and Express Scripts parted ways last year after failing to renew contract worth $5 billion over disagreement on reimbursement rates. With reports suggesting that the Express Scripts-Medco merger might get FTC’s green flag soon, there have been concerns about the implications for Walgreen and the future of its prescription business from Medco (Walgreen filled 125 million prescriptions for Medco clients in 2011). There were also talks of Walgreen considering buying out Rite Aid.
The recent buzz is that Walgreen could try to enter a new contract with Express Scripts as the management appeared positive about doing business with Medco.  In fact, UBS expects the deal as soon as April or May and has even raised its price target for Walgreen to $39.  This would certainly be in the interests of both Walgreen and Express-Medco.
We currently value Walgreen with a $35 Trefis price estimate of its stock, which is 3% ahead of the current market price.Notes:
- Walgreen Sees Flexibility To Keep Medco Clients If Merger Wins Approval, Fox Business, March 2012 [↩]
- Walgreen’s Target, Estimates Boosted at UBS (WAG), Dividend.com, March 2012 [↩]