Walgreen Slumps on Express Scripts Dispute

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (Trefis) -- Walgreen's stock has reached a new low for the year as its contract dispute with Express Scripts(ESRX) threatens to cost the drug store chain a large part of the $5 billion business starting 2012.

This comes as Walgreen attempts to retain as much prescription sales as possible through direct contracts with large health plans and employers.

It acknowledged the impasse started to reflect in weaker-than-expected October sales. The stock continued to weaken in anticipation of script exodus with major analyst downgrades like the one from Credit Suisse, and touched the low after being downgraded by Morgan Stanley. Walgreen competes with CVS Caremark(CVS) and Rite Aid(RAD).

View our analysis for Walgreen here.

Shares of Walgreen have fallen more than 30% since it first announced in June that it will stop filling prescriptions for customers covered by Express Scripts. With the Walgreen-Express Scripts contract expiring in December 2011 and still no signs of any compromise settlement, Credit Suisse recently cut its price target on Walgreen to $31 from $42, downgrading it to "neutral" from "outperform."

The weakened stock tanked to a further low after Morgan Stanley became the latest firm to downgrade the drugstore chain's shares, downgrading the stock to "Underperform" from "Equal-weight" with a new price target of $29 from the previous $45.

The stalemate threatens to cost Walgreen about $5 billion in annual sales with 90 million prescriptions, or about 7% of its business. Walgreen recently projected the possibility of a loss in 2012 of more than $3 billion in revenue because of the planned loss of business from customers whose prescription drug coverage is managed by Express Scripts.

Even though Walgreen is trying to retain as much part of the prescription business possible, it still may lose 80% to 90% of the business. Also, after having recently concluded its $1 billion cost-cutting program, it will find it difficult to cut more costs to cover prescription losses.

As both parties do not appear likely to come to terms by end-year, most of the 90 million prescriptions may become available in the open market. As Express members look for a new pharmacy to serve their needs, competitors like CVS Caremark and Rite Aid stand well placed to benefit.