Walgreen Not Sweating Loss of Express Scripts Customers to CVS — Should It Be?

by Barry Cohen | December 22, 2011 8:40 am

Absent a last-minute settlement, it’s a good bet executives from Walgreen (NYSE:WAG[1]) and Express Scripts (NASDAQ:ESRX[2]) won’t be ringing in the new year together. However, if the two companies can’t get together, look for the champagne to be flowing freely at the Woonsocket, R.I., headquarters of Walgreen rival CVS Caremark (NYSE:CVS[3]).

That’s because CVS should absorb a huge chunk of the millions of drug prescription customers Walgreen will lose when its contract with pharmacy benefits manager, or PBM, Express Scripts expires on the first day of 2012. In fact, CVS projects it should corral about 23 million prescriptions[4] that Walgreen has been selling through Express Scripts, according to Bloomberg.

Those additional prescriptions could boost CVS profit by as much as 11 cents per share in 2012. CVS recently said it might earn $3.15 to $3.25 a share in 2012, according to Bloomberg. Perhaps not wanting to jinx itself, the CVS EPS forecast didn’t factor in any of Walgreen’s potential losses.

Given the prospect of a huge influx of new customers and a recent dividend increase, Seeking Alpha called CVS an “Investor’s Dream,”[5] projecting the company’s shares could hit $45 by summer. You have to wonder if they were referring to summer in the southern hemisphere, considering CVS closed at $40.18 on Wednesday, up more than 10% since Monday’s final bell.

Meanwhile, Walgreen traded below $31 Wednesday morning before recovering to close at $33.37, down only 13 cents. Investors might have overreacted to the possible loss of customers resulting from the dustup with Express Scripts. They likely came to their senses after recognizing Walgreen, based just outside Chicago, is the biggest pharmacy chain in the country with 8,200 retail outlets. CVS has 7,300 drug stores, about 43% of which are within a mile of a Walgreen.

Since the dispute with Express Scripts erupted in June, Walgreen has been trying to get most of its customers who have their drug coverage managed by Express Scripts to switch to another PBM. The company admitted this has been a failure. “(Walgreen’s) negotiations with health plans and employers had resulted in retaining just 11.4 percent, or about 10 million, of the 90 million prescriptions managed by Express Scripts that were filled by Walgreen in the fiscal year that ended Aug. 31,” according to The New York Times[6].

While Walgreen prescriptions rose 5% to 819 million in 2011, the company expects a decline of 1% to 3% in 2012 volume. The loss of Express Scripts customers is expected to have a negative impact of 21 cents a share in fiscal 2012, Walgreen told The New York Times. Analysts have pegged the company’s revenue loss at more than $4 billion.

Walgreen hardly seems to be panicking at the prospect of losing Express Scripts’ customers. But the company’s blood pressure could spike considerably should Express Scripts’ proposed $29 billion acquisition of PBM Medco Health Solutions (NYSE:MHS[7]) go through. The deal has sparked antitrust concerns, and perhaps after seeing the government kill the proposed purchase of T-Mobile by AT&T (NYSE:T[8]), Walgreen is confident the potential PBM combination will suffer the same fate.

As of this writing, Barry Cohen was long WAG.

Endnotes:
  1. WAG: http://studio-5.financialcontent.com/investplace/quote?Symbol=WAG
  2. ESRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ESRX
  3. CVS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVS
  4. corral about 23 million prescriptions: http://www.bloomberg.com/news/2011-12-20/cvs-may-take-23-million-walgreen-purchases-boosting-profit-1-.html?cmpid=yhoo
  5. “Investor’s Dream,”: http://seekingalpha.com/article/315062-caremark-is-an-investor-s-dream-increasing-dividends-and-stock-value?source=yahoo
  6. according to The New York Times: http://www.nytimes.com/2011/12/22/business/walgreen-faces-loss-of-millions-of-pharmacy-customers.html?partner=yahoofinance
  7. MHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MHS
  8. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T

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