Walgreen (NYSE:WAG) recently announced that it would discontinue filling prescriptions for people covered by Express Scripts from Jan. 2012 after its contract renewal negotiations failed on the grounds of uncompetitive reimbursement rates offered by the pharmacy benefits manager. Walgreen competes with other leading pharmacy services provider such as CVS Caremark (NYSE:CVS) and we value Walgreen with a $43.70 Trefis price estimate of its stock at parity with its current market price. While there’s another 6 months to go before the ongoing contract between the two expires, we take a closer look at how the split affects Walgreens’ business.
Impact of the Split
Walgreen expects to fill around 90 million prescriptions processed by Express Scripts in 2011 making up over $5 billion – or over 7% of Walgreen’s sales so clearly this move impacts Walgreen’s business. 
While there are other pharmacy chains where Express Scripts’ members could fill their prescriptions instead, can Express Scripts’ really afford to let go of Walgreen’s network of over 7,700 pharmacies spread across the country? With a limited distribution, Express Scripts stands to lose the healthcare sponsors to other pharmacy benefits managers, notably CVS Caremark.
How much could be the impact on Walgreens’ stock?
We currently estimate the number of prescriptions filled by Walgreens to grow from 702 million in 2010 to almost 880 million over our forecast horizon. Parting with Express Scripts could however result in the number of prescriptions filled by Walgreens rising less than we forecast to around 780 million by the end of our forecast period leading to downside of just over 10% to our current $43.70 price estimate.
Walgreens has been aggressively looking for ways to compensate for the drop in revenues due to the split with Express Scripts and Walgreens acquisition of Drugstore.com might offer some respite. See Looking at Walgreen Bid for Drugstore.com
You can drag the graph above to see the impact on Walgreen’s stock price estimate.Notes: