Walgreen‘s (NYSE:WAG) sales continued to decline for the fifth consecutive month resulting from the disruptive discontinuation of Walgreen’s contract with pharmacy benefits manager Express Scripts (NYSE:ESRX) this year. Express accounted for over 12.7% of its business in May 2011 and its exit dipped Walgreen’s same store sales by 5.8% in May. Walgreen and Express Scripts have recently dropped the legal claims filed against each other after their talks fell out last September, fueling market expectations that it might open the door for reconciliation among the two estranged companies. However, Walgreen has denied any impact of the withdrawal of legal claims on the possibility of a new contract. Walgreen walked out of Express Scripts network last year over the reimbursement rate dispute. Walgreen’s dispute with Express Scripts and prescription business exodus has significantly benefited its competing drug retailers, particularly CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD).
Walgreen’s Sales Continue To Suffer While Competition Benefits
Walgreen’s May sales decreased by 1.6% compared to May 2011 due to reduced pharmacy sales as it’s no longer a part of Express Scripts network, offset by opening of seven new stores and acquisition of 28 Bioscrip community pharmacies.
As a result, prescriptions filled at its comparable stores declined by 8.5% leading to 4% lower pharmacy sales. Comparable store pharmacy sales also were negatively impacted by 4 percentage points due to generic drug introductions. Prescriptions processed by Express Scripts comprised 12.7 percent of Walgreen prescriptions in May 2011 and contributed to a 10.8 percentage point decline in comparable store prescriptions. Decreased footfall due to Express exit also moderated front-end sales. Overall, 3Q sales for fiscal 2012 were 3.3% lower compared to the same period last year, with 6.5% lower comparable store sales and 9% fewer prescriptions.
Walgreen’s biggest competitors CVS Caremark and Rite Aid have significantly benefited from the fallout last quarter gaining millions of new prescriptions as Express members looked for non-Walgreen pharmacies to fill their prescriptions, and ended up on CVS or Rite Aid stores as a convenient alternative. In particular, CVS has raised its full year guidance, and is now trying to turn the new customers more sticky by taking advantage of the delay by both parties in hammering out a new deal. CVS could tap up to 20 million transferred prescriptions if the impasse continues through 2012.
Last week, both Walgreen and Express Scripts withdrew their legal claims against each other filed in September, fueling expectations that it might ease the possibility of a fresh future deal between the two. However, Walgreen has denied any impact of the withdrawal of legal claims on the feasibility or imminence of a new contract.
Recently another large PBM Medco folded into Express Scripts, creating the industry’s largest pharmacy benefits manager, which has raised concerns about the future of Walgreen’s business with Medco even though both expect to honor the existing contracts. Walgreen has recently renewed pharmacy-services deal with another major PBM partner UnitedHealth’s OptumRx with a ‘long-term’ agreement.
We currently value Walgreen with a $35 Trefis price estimate of its stock, 10% ahead of the current market price.