Walgreen Loses if It Can't Make Up With Express Scripts
NEW YORK (
) -- If
Walgreen
(WAG)
and
Express Scripts
(ESRX)
don't start working together again both companies could be hurt, but Walgreen potentially has more on the line, according to Gabelli analyst Jeff Jonas.
Express Scripts, a pharmacy benefit manager, stopped covering in-network prescriptions filled at Walgreen at the start of the year. Walgreen said Express Scripts wanted to cut reimbursement rates to below-industry-average cost levels and wanted to
unilaterally define its contract terms
.
"Under the terms proposed by Express Scripts, it would not make good business sense for the strategic direction of our company to continue our relationship with them," CEO Greg Wasson said in a statement last June. "Walgreens is committed to providing quality, convenient and cost-effective pharmacy services to our patients, but we cannot continue to deliver these services under the terms and rates Express Scripts offered."
In the company's first-quarter earnings report, issued in December, Walgreen noted that its decision to stop working with Express Scripts caused a
.
Since the relationship was terminated, Walgreen introduced a transition plan to help maintain some of its Express Scripts customers. Walgreen also had record sign-ups for its prescription savings club, some of whom have Express Scripts. The prescription savings club includes savings on more than 8,000 brand-name drugs and all generic medications.
Though there is no speculation of a deal between the two companies and no formal talk of one, Gabelli's Jonas said the two companies might be able to reach an agreement around March.
"As has been the case since June, when Walgreens unilaterally stated it would leave our network, we would be open to having Walgreens in our network, but only at rates and terms that are right for our clients and consistent with other pharmacies in our network," an Express Scripts spokesman said in an email. "That position has remained the same."
A Walgreen spokesman said in an email, "On Dec. 15, we sent Express Scripts one more proposal in our best attempt to reach a resolution before Jan. 1 and avoid any disruption in patients' care. But Express Scripts didn't accept our offer. Instead, they wanted to wait until sometime in January to continue negotiations, even though that would mean significant disruption in care for patients across the country. As we have said repeatedly, if Express Scripts presents us with a fair and competitive offer, we would consider it."
When asked if Walgreen and Express Scripts resumed negotiations in January, the Walgreen spokesman said he couldn't comment further than the previous statement.
If Walgreen doesn't make up with Express Scripts, it could lose $4 billion in revenue over four quarters, Jonas said. And with Express Scripts trying to acquire
Medco
(MHS)
, which is also a pharmacy benefit manager, this could take another $5 billion or so away from Walgreen in 2013, Jonas added. If Express Scripts and Medco merge
, Walgreen's position for negotiating in the future is weakened
, noted Jefferies analyst Scott Mushkin in a report.
For Express Scripts, not resolving the situation with Walgreen could make the company seem difficult to work with and the company may have a hard time when client renewals take place, Jonas noted.
The more months that go by without an agreement with Express Scripts, the less likely Walgreen customers are to return to the store, Jonas said. Once the two companies sit down, Jonas said he anticipates that a deal will take at least weeks to put in place.
-- Written by Alexandra Zendrian
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