Walgreen Looks to Cut Fat in 2012 After Express Scripts Exit
Walgreen (NYSE:WAG) is trying to minimize its losses following Express Scripts’ exit by cutting costs and expects to offset around 50% of gross profit reduction in fiscal 2012 (ending August 2012). Even though Walgreen is trying to retain as much part of its 2011 prescription business possible, it still may lose 90% of the Express Scripts business going forward. Also, after having recently concluded its three year $1 billion cost-cutting program, it may find it difficult to cut more costs to cover prescription losses. Walgreen competes with the other leading pharmacy services providers CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD).
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Business Retained/Lost and Savings Targets
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Express Scripts represented about $5 billion annual business for Walgreen with 90 million prescriptions, or about 7% of its business.
Walgreen expects to retain around 10 million of the prescriptions it filled for Express Scripts in 2011, amounting to a loss of almost 90% prescriptions. Around 100 of Express Scripts clients, encompassing health plans and employers, are likely to continue with Walgreen pharmacies in 2012, even though they would lose the large Express clients like Department of Defense Tricare plan (18% of $5.3 billion business) and WellPoint (~25% business). The company hopes to maintain 97-99% of its 2011 prescription volumes in fiscal 2012 (ending in August) while it works to win new contracts.
Walgreen plans to compensate this loss through right-sizing and cost cuts especially from the stores that have high proportion of Express Scripts business and expects to save up to $150 million. This assumes that Walgreen manages to retain 25% of the Express Scripts business, which seems to be rather optimistic. The majority of these cost cuts would only begin to take effect from the latter half of fiscal 2012. However, after having recently concluded its three year $1 billion cost-cutting program, it may find it difficult to cut more costs to cover prescription losses. Also, there is likelihood of additional reimbursement pressure for Walgreen or potential loss of business if the proposed merger between Express Scripts and Medco Health Solutions (NYSE:MHS) goes through.
We value Walgreen with a revised $35 Trefis price estimate of its stock, which is in line with the current market price.
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