Walgreen 1Q profit drops on Express Scripts fight

AP News
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Posted: Dec 21, 2011 5:10 PM
Walgreen 1Q profit drops on Express Scripts fight

Walgreen's first-quarter earnings fell more than 4 percent due in part to a slow flu season and its impending split from the Express Scripts pharmacy network, a multibillion-dollar dispute that looks no closer to resolution in the final days of the year.

Since June, Walgreen and Express Scripts have said they were preparing to stop doing business when the three-year contract expires at the end of 2011. Walgreen gets $5.3 billion in annual revenue from Express Scripts, but the Deerfield, Ill., company has said it would rather give that up than continue filling unprofitable prescriptions.

President and CEO Greg Wasson said the company made one last attempt last week to come to terms with Express Scripts, but the two sides were unable to resolve their differences.

Walgreen remains open to another offer, Wasson said.

Unless the companies strike a last-minute deal, most people whose prescription drug benefits are handled by Express Scripts won't be able to fill their prescriptions at Walgreen stores, starting in January. Express Scripts clients include WellPoint Inc., which is the largest U.S. health insurer based on membership, and TriCare, the health plan that serves military members and their families.

Walgreen is the biggest drugstore chain in the U.S. with 7,812 locations.

Shares of Walgreen fell as much as 8.1 percent in early trading, but later recovered and closed down 13 cents at $33.37 while the broader markets edged up less than 1 percent.

The decision to stop doing business with Express Scripts cost Walgreen a penny per share in sales at pharmacies open at least a year and a penny per share in expenses during the fiscal quarter.

The company also took a charge of 1 cent per share from the lack of a traditional cough, cold and flu season. Walgreen administered 5 million flu shots through Nov. 30 compared with 5.6 million a year ago.

Net income fell to $554 million, or 63 cents per share, from $580 million, or 62 cents per share, a year ago, when it had more shares outstanding. Revenue grew 4.7 percent to $18.16 billion, but selling, general and administrative expenses climbed 5 percent because of its acquisition of drugstore.com and other items.

Analysts surveyed by FactSet expected, on average, earnings of 67 cents per share and $18.24 billion in revenue.

In the wake of the Express Scripts stalemate, Walgreen is trying to hold on to as many prescriptions as possible by making its own arrangements with companies and health plans. Based on prescriptions Walgreen is filling in December and other trends, the company said it expects to keep between 97 percent and 99 percent of its 2011 prescription volume.

Barclays Capital analyst Meredith Adler said that projection suggests Walgreen will lose between 60 and 84 percent of the Express Scripts prescriptions. Competitor CVS Caremark Corp. said Tuesday that it believes it could pick up 17 million to 23 million prescriptions as a result of the dispute.

Analysts say the split will also hurt sales of other products, since fewer shoppers would be shopping at Walgreen stores.

Another potential issue for Walgreen is that Express Scripts is in the process of buying Medco Health Solutions Inc., another large pharmacy benefits manager. If that deal goes through, Walgreen may lose Medco's clients over time.

Earlier this month, Walgreen said sales at stores open at least a year grew 2.5 percent during the quarter, but it said the Express Scripts fight reduced those sales by 1.1 percent. Sales at stores open at least a year are considered a key measurement of retailer health because they exclude results from stores that have opened or closed in the last year.

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Tom Murphy contributed to this story from Indianapolis.