Walgreen‘s (NYSE:WAG) same store sales dipped by 6.8% last month mainly owing to its split with pharmacy benefits manager Express Scripts (NYSE:ESRX). Prescriptions processed by Express Scripts comprised 12.6% of Walgreen’s prescriptions in March 2011. Now with Medco (NYSE:MHS) folding into Express Scripts, there are obvious concerns about the future of Walgreen’s business with Medco, although Walgreen says it hopes to honor its existing contracts. Medco represented around 125 million prescriptions for Walgreen in 2011. There are also expectations that Walgreen may try to renegotiate a deal with Express Scripts. Walgreen competes with CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD).
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Walgreen’s March sales decreased by 4.3% compared to March 2011 due to reduced pharmacy sales as it’s no longer a part of Express Scripts network. As a result, prescriptions filled at its comparable stores declined by 11.4% leading to 11% lower pharmacy sales. Comparable store pharmacy sales also were negatively impacted by 2.5 percentage points due to generic drug introductions and by 1 percentage point due to lower incidence of cough, cold and flu.
Concerns Over Medco Contracts
Since Walgreen walked out of Express Scripts network last year over the reimbursement rate dispute, now Express’s acquisition of Medco has raised concerns over the future of Walgreen-Medco contracts. Walgreen says it hopes to maintain its contracts with Medco, unless the new company took “an extraordinary action” to terminate the existing contracts or significantly modify the terms of the agreements. Meanwhile, there are also rumors that Walgreen may try to enter into a fresh deal with Express Scripts.
We currently value Walgreen with a $35 Trefis price estimate of its stock, which is almost in-line with the current market price.