Express Scripts Divorce Could Cost Walgreens
by Justin Dove, Investment U Research
Wednesday, June 29, 2011
Express Scripts (Nasdaq: ESRX), a pharmacy benefits manager, provided Walgreens (NYSE: WAG) $5.3 billion in annual revenue and was forecasted to process 90 million prescriptions this year. But with the recent news that Express Scripts and Walgreens will be parting ways... Walgreens stock went down four percent last Tuesday.
This news came on the heels of Walgreens announcing a record $18.4 billion in sales for the third quarter. The company also announced that it returned $535 million to shareholders in the form of dividends and stock repurchases.
According to Walgreen's Chief Financial Officer Wade Miquelon, Walgreens is better served without Express Scripts. "Under any scenario of what Express Scripts is proposing... it's much better for us to go it alone," Miquelon said.
Apparently, Express Scripts was asking for reimbursement below market value for prescriptions and Walgreen Co. refused the terms. The current contract will expire at the end of the year and Walgreens will look to make up the difference in revenue.
"There are really hundreds of other PBMs and managed care plans that have us, that value us," Miquelon said.
Walgreens Announces Plans to Buy Drugstore.com
Walgreens also recently announced plans to break off Walgreens Health Initiatives subsidiary and buy online drug distributor Drugstore.com. The acquisition will bring three million new customers and exhibits Walgreens ongoing shift toward online fulfillment.
Another sign that Walgreens is making a commitment to the web is a new program unveiling in Chicago, Illinois and San Jose, Calif. this month. Web Pickup Service allows customers the option of ordering a prescription online and picking it up at a local Walgreens within an hour. The service is said to be available in all locations by late August.
Walgreens Still a Juggernaut in Retail Pharmacy Sector
While Walgreens will definitely take a hit next year without Express Scripts, they are still a juggernaut in the retail pharmacy game.
- Walgreens added or acquired 41 new stores in the third quarter and lost 16 for a net gain of 25 new locations.
- They operate over 8,000 locations and business has been growing steadily.
As more baby boomers reach retirement and the demand for medication grows, Walgreen Co. is likely to grow as well.
Express Scripts represented about seven percent of Walgreens revenue, which is about the same as Walgreens yearly growth. If Walgreens can't recover the revenue, the worst case is probably a year of stagnation. But that scenario seems unlikely to last too long due to a growing amount of internet customers and services.