Walgreen’s (NYSE:WAG) stock jumped 5% on Tuesday following its upgrade to UBS’s ‘most preferred’ list. The upgrade was based on the speculation that it might soon renegotiate a fresh deal with its estranged pharmacy benefits manager Express Scripts (NYSE:ESRX).
Express Scripts provided $5 billion worth of business to Walgreen until last year, but failed to renew its contract this year over a dispute over reimbursement rates.Express Scripts has now acquired its competitor Medco Health Solutions, which has generated curiosity regarding the future of Walgreen’s business with the new entity. Medco accounts for a large portion of Walgreen’s business.
Walgreen filled 10% fewer prescriptions last quarter due to the loss of Express Scripts’ business and could lose up to 80 million prescriptions worth $4 billion in revenues this year. There have been added concerns about the risks of Walgreen losing more prescription business from Medco after its merger with Express Scripts(Walgreen filled 125 million prescriptions for Medco clients in 2011), even though the company’s management indicated in its latest earnings call that it hopes to maintain its relationship and contracts with Medco. There was also speculation thatWalgreen could buy Rite Aid to strengthen its position vis-a-vis the Pharmacy Benefit Managers.
Separately some believe that Walgreen could try to enter a new contract with Express Scripts following the Medco merger. UBS expects a deal as soon as April or May and has even raised its price target for Walgreen to $39. 
We currently value Walgreen with a $35 Trefis price estimate of its stock, which is in-line with the current market price.Notes: