Express Scripts And Walgreen Make Up But Tricare Is Still A Concern

Walgreen (NYSE:WAG) reported August sales of $5.85 billion, a decrease from $6.12 billion the same period last year. While the total front-end sales increased by 0.9%, comparable store front-end sales decreased by 0.6% over the same period. This was accompanied by a decrease of 2.2% in customer traffic in comparable stores. The sales figures were in-line with our expectations following the loss of Express Scripts customers. However, in July 2012, both the companies entered into another multi-year pharmacy network agreement to settle their long-standing dispute. The new contract would enable Walgreen to fill prescriptions of Express Script customers from September 15, 2012.

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Renewed contract with Express Scripts to help rebound sales

Express Scripts manages more than a billion prescriptions per year for its millions of users. Following the disagreement, Walgreen stopped filling prescriptions from Express Scripts customers starting January 2012. The company sales have been on a decline since. Prescriptions filled at comparable stores decreased by 6.8% in August. ^[1] The negative impact on comparable store prescriptions filled due to not being part of the Express Scripts’ pharmacy network stood at 10.7 percentage points. Prescriptions processed by Express Scripts comprised 12.6% of Walgreen’s prescriptions in August 2011.

We believe that Walgreen is poised to compensate for the losses incurred since the termination of the previous deal in January 2012 and regain its share in retail prescriptions filled annually in the U.S. We expect its market share to grow to 21% by the end of our forecast period. This effort will be backed by the new loyalty program that the company is in the process of rolling out.

Key risk: Tricare’s decision to keep Walgreen out of its pharmacy network

The U.S. Department of Defense’s Tricare health plan, which provides healthcare coverage to military families, announced last week that it will continue to designate Walgreen as a non-network pharmacy provider. ^[2] Prescriptions for Tricare’s clients are processed by Express Scripts. Tricare represented 18% of the prescriptions processed by the company for Express Scripts. We expect the majority of Tricare users to stay away from Walgreen stores because of higher out-of-pocket costs involved. This will have a considerable impact on the number of prescriptions that Walgreen fills for Express Scripts.

We currently have a $40 price estimate for Walgreen which is approximately 10% above the market price.

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1. August sales decrease 4.5 percent, Walgreen, September 2012 [↩]
2. Walgreen looses key Express customer, Reuters, September 2012 [↩]