Walgreen Earnings To Take A Hit On Lost Express Scripts Sales

Walgreen (NYSE:WAG) is scheduled to announce its Q4 FY2012 results this Friday, September 28. While the company has yet to regain customers it lost to competitors like CVS (NYSE:CVS), Rite Aid (NYSE:RAD) and Wal-Mart (NASDAQ:WMT) due to its now resolved conflict with pharmacy benefits manager Express Scripts (NASDAQ:ESRX), the expectations from the earnings are low. To add to its troubles, the company faces costs associated with the recently launched ‘Balance Rewards’ program in what looks to be an increasingly bitter battle between it and CVS.

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Prescriptions lost because Express Scripts impasses

The number of prescriptions filled by the company have dipped steadily since January when the deal with Express Scripts expired. Prescriptions filled at comparable stores decreased by 12%, 5% and 7% in June, July and August respectively.

The primary reason for the consistent decline was the lost Express Scripts user-base though the loss was partially offset by higher incidence of flu and calendar day shifts within the period. Prescription Drug Sales amount for 60% of our estimate for the company, and the sharp drop in number of prescriptions filled is bound to have a major impact on the company.

The company announced a renewed multi-year deal with Express Scripts which came into effect mid-September and hence won’t have an impact on the quarterly results. The same holds true for the Balance Rewards program which too came into effect mid-September. The initial response to the program was good but the effects won’t be apparent till mid-FY 2013. The company would undoubtedly be looking to regain the lost Express Scripts customers which could prove to be a  tough task as competitors have been aggressively discounting and marketing their loyalty programs to retain the users.

Generics proliferation to negatively impacts sales

Generic drugs also contributed to the consistent decrease of sales in comparable stores over the past three months. 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 currently retails approximately 700 generic drugs and could be looking to add more in order to attract uninsured customers. 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 have a $39 Trefis price estimate for Walgreen which is 10% more than the current market price.

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