Walgreen Co. said Tuesday it will end a $5.3-billion-per-year relationship with Express Scripts Inc., saying Express Scripts was not paying it enough money to fill prescriptions and was trying to dictate terms of their partnership.
The announcement follows a similar contract fight a year ago with CVS Caremark Corp. that was eventually resolved.
The disclosure of the impasse with Express Scripts Inc. overshadowed news that Walgreen's profit climbed 30 percent in its third fiscal quarter.
Walgreen shares fell $2.66, or 5.9 percent, to $42.52 in morning trading. Express Scripts fell 53 cents to $54.26.
Walgreen, the biggest drugstore chain in the U.S., said contract negotiations with Express Scripts have failed, and it will stop participating in the pharmacy benefits manager's prescription plans starting Jan. 1.
Pharmacy benefits managers like Express Scripts pay Walgreen to fill prescriptions. Walgreen said the St. Louis company wanted to cut those payments so they were less than the published cost of providing the prescriptions. Walgreen said Express Scripts' payments were already low, and it said the new rates would have been "unacceptable."
It said Express Scripts will process about 90 million prescriptions that will be filled at Walgreen stores in fiscal 2011, which will bring Walgreen about $5.3 billion in revenue. That's about 7 percent of the company's total annual revenue.
Walgreen said Express Scripts also wanted to unilaterally define contract terms including definitions of name-brand and generic drugs, and transfer of prescription drug plans to different networks. It said those terms would have made its business unpredictable. Walgreen said the combination of low rates and unpredictable results would have been worse than the loss of $5.3 billion in annual revenue.
Express Scripts said it has been preparing for Walgreen's departure. It said more than 50,000 other pharmacies participate in its network. About 20 percent of all U.S. prescriptions are filled at a Walgreen location, and the company has filled 617 million prescriptions in the first three quarters of the fiscal year.
The struggle comes almost exactly a year after a similar struggle between Walgreen and CVS Caremark. In June 2010, Walgreen said it wanted to transition out of CVS Caremark's network by the start of 2011. Walgreen wanted Caremark to pay it more for filling prescriptions, and it wanted Caremark to drop policies encouraging members to fill prescriptions at CVS's stores. CVS Caremark had said it would end the relationship in July.
A breakup with CVS Caremark would have cost Walgreen about $4.5 billion in annual revenue. But within about a week, the companies agreed to a multi-year deal. They did not disclose terms.
Deerfield, Ill.-based Walgreen also reported it net income grew to $603 million, or 65 cents per share, during the three months ended May 31. That's up from $463 million, or 47 cents a share, a year ago when its results were weighed down by costs associated with the health care reform law, its acquisition of the Duane Reade chain, and restructuring costs.
Walgreen said its third-quarter results included a penny per share in restructuring costs. The company had a total of 7,715 stores as of May 31.
FactSet says analysts expected earnings of 62 cents per share.
Revenue climbed to $18.37 billion from $17.2 billion.