Walgreen Co. (WAG:US), the largest U.S. drugstore chain, surged the most since 2008 after renewing a contract to provide Express Scripts Inc. customers with prescriptions, ending a dispute that contributed to an 11 percent decline in the retailer’s quarterly profit.
Walgreen will become part of the network of pharmacies available to Express Scripts clients as of Sept. 15, the companies said today in a statement. Terms weren’t disclosed.
The agreement ends a standoff that centered on reimbursement rates and caused Walgreen to lose customers to CVS Caremark Corp. (CVS:US), Wal-Mart Stores Inc. (WMT:US) and other drugstore rivals. The contract with Express Scripts, which ended on Dec. 31, had generated $5.3 billion in annual sales (WAG:US) for Walgreen.
The pact “removes significant overhang for Walgreen,” Ross Muken, an analyst at International Strategy & Investment Group LLC in New York, wrote today in a note. He rates the shares as underweight, equivalent to a sell recommendation.
Rival drugstore chains CVS fel (CVS:US)l 6.5 percent to $45.43 and Rite Aid Corp. (RAD:US)declined (RAD:US) 6.3 percent to $1.20. Walgreen shares have slumped 20 percent from June 21, 2011, when it announced it didn’t plan to renew its contract with St. Louis-based Express Scripts.
Impact on CVS
CVS said today in a statement that it expects to boost profit by about 5 cents a share in the third and fourth quarters from the impasse between Walgreen and Express Scripts. It anticipates retaining at least half of the business taken from Walgreen in the fourth quarter.
CVS, based in Woonsocket, Rhode Island, raised its full- year earnings forecast in May and projected a benefit of as much as 4 cents a share in the second quarter from the dispute.
The revenue generated from Express Scripts represented about 7.3 percent of Walgreen’s $72.2 billion in sales (WAG:US) in fiscal 2011.
Express Scripts manages pharmacy benefit programs for private employers, unions and government health plans. The dispute revolved around reimbursement rates for 88 million prescriptions, or 10 percent of Walgreen’s pharmacy business. Wal-Mart, CVS and Rite Aid had stepped up marketing to grab Walgreen’s prescription customers amid the impasse.
Earlier this month, Walgreen agreed to buy the owner of the USA Drug chain for about $438 million to add stores in the southern U.S. In June, Walgreen entered into a pact to purchase a 45 percent stake in Alliance Boots GmbH for $6.7 billion to create a global chain of pharmacies. Alliance is the U.K.’s largest drugstore-chain company.
Walgreen last week named retired McDonald’s Corp. (MCD:US) Chief Executive Officer James Skinner as nonexecutive chairman, replacing Al McNally as part of the board’s rotation of directors. Skinner, 67, has served as a Walgreen director since 2005.
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