A Recovery In Prescriptions Filled Brightens Walgreen’s Future

by Trefis Team
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Walgreen Co.
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Leading drugstore chain Walgreen (NYSE:WAG) seems set to put behind the Express Script (NASDAQ:ESRX) fallout behind it and grow its prescriptions filled starting next year. The company’s primary business of Prescription Drugs Sales had been suffering after it exited Express Scripts pharmacy network in January this year. The disagreement had resulted in a loss of approximately 10 million customers for Walgreen. [1] The warring companies signed upon a new agreement in mid-July that allowed Express Scripts customers to get their prescriptions filled from Walgreen’s stores from mid-September. [2]

With a new multi-year deal in place and its recently launched Balance Rewards loyalty program adding further incentive for Express Scripts customers to restart using the company’s pharmacies, we expect the company to regain most of its lost customer base. However, about 20% of Express Scripts prescriptions will still be inaccessible to the company as Tricare decided to keep Walgreen out of its pharmacy network. [3] Prescription drug sales amount to about 65% of company’s total sales and a growth in prescriptions count will help offset the negative impact of generic introductions on sales. [4]

The company currently operates 8,057 drugstores [5] and competes with CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD) among others.

View our detailed analysis for Walgreen

Decline in prescriptions has narrowed

Walgreen’s comparable prescriptions filled dropped sharply on a year on year basis in January as a result of the dispute with Express Scripts. However the company has been able to arrest the decline with aggressive promotional activities and the launch of its Balance Rewards loyalty program. As evident from the graph below, the drop has improved from -10% in June earlier this year to just -3% in November.

A significant part of the improvement can be attributed to the recent acquisition of USA drugs. With more Express Scripts customers expected to return and the company looking to launch new stores and relocate under-performing ones, we expect the company to regain its market share over the next couple of years.

Generic introductions to improve margins

The generics command higher margins of around 18% compared to around 2% for branded drugs [6] and have significant impact on the overall gross margins. The generic dispensing rate has been consistently increasing over the past year and contributed to the consistent decrease of sales. As the generic drugs retail at considerably lower prices of as low as $12 for a 90-day supply compared to the branded ones, the top-line sales are impacted. The company would look to attract more uninsured customers through the lower priced generic drugs. With a lot of branded drugs scheduled to go off patent in the next couple of years, the impact of generics on comparable sales could be profound.

We expect that further introduction of generic drugs will help the company improve its margins and fuel further expansion.

We have a $38 Trefis price estimate for the company which is approx. 15% above the current market price.

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Notes:
  1. Prescriptions Drug War Begins, Wall Street Journal, September 2012 []
  2. Walgreen and Express Scripts Reach Deal, The New York Times, July 2012 []
  3. Walgreen loses key Express customer; August sales drop, Reuters, September 2012 []
  4. 2012 Annual Report, Walgreens, October 2012 []
  5. Walgreens November Sales Decrease 3.9 Percent, Walgreens, December 2012 []
  6. Prescription for Success, Barrons, June 2012 []
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