Walgreens says it will split with Express Scripts

Walgreens says it will split with Express Scripts

Credit: AP

In this June 20, 2011 photo, a Walgreens pharmacy sign is displayed, in Philadelphia. Walgreen Co., the biggest drugstore chain in the U.S., said Tuesday, June 21, its profit grew 30 percent in the fiscal third quarter, and announced it is tangling with another major pharmacy benefits manager.(AP Photo/Matt Rourke)

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by MARLEY SEAMAN

AP

Posted on June 22, 2011 at 10:21 AM

Updated Wednesday, Jun 22 at 12:52 PM

NEW YORK (AP) -- Walgreen Co. said that it is willing to walk away from more than $5 billion in annual revenue because pharmacy benefits manager Express Scripts Inc. doesn't pay it enough to fill prescriptions.

If the companies don't settle their dispute, people whose prescription benefits are handled by Express Scripts won't be able to get their prescriptions filled at the biggest drugstore chain in the U.S., and Walgreen would give up about 7 percent of its annual revenue.

The announcement Tuesday follows a similar contract fight a year ago between Walgreen and CVS Caremark Corp. that was resolved less than two weeks after it became public.

The impasse with Express Scripts overshadowed news that Walgreen's net income climbed 30 percent in its third fiscal quarter.

Walgreen stock fell $1.90, or 4.2 percent, to $43.28. Express Scripts finished up 20 cents to $54.99 after falling as much as 3.3 percent earlier in the day.

Walgreen, which has spent months negotiating a new contract with Express Scripts, said it will stop participating in Express Scripts' prescription plans starting Jan. 1.

Express Scripts is the second-largest pharmacy benefits manager in the U.S., and it expects to handle at least 750 million prescription claims in 2011. Walgreen said about 90 million of those prescriptions will be filled at its stores.

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."

Express Scripts makes money by reducing costs for health plan sponsors and members, so it tries to keep spending as low as possible.

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 be worse than the loss of $5.3 billion in annual revenue.

Express Scripts said Walgreen's rates are higher than other pharmacies, and with drug costs increasing, those rates need to come down. It said it has not asked for other changes to terms of the older contract, and has not asked to change the definition of generic or name brand medications. It accused Walgreen of wanting to pick and choose which plan members it will serve so it can maximize its profits.

"It is shocking to us that Walgreens would back away from the table with six months to go in the current agreement, especially considering that negotiations are part of the normal course of business," said Express Scripts Chairman and CEO George Paz.

The company said it has been preparing for Walgreen's departure and that more than 50,000 other pharmacies participate in its network. Walgreen had 7,715 locations as of May 31, and about 20 percent of all U.S. prescriptions are filled at a Walgreen store. 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 dispute between Walgreen and CVS Caremark that would have cost Walgreen about $4.5 billion in annual revenue. Last June, 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 stores. CVS Caremark responded by saying it would end the relationship in July, but the companies agreed to a multiyear deal soon afterward. They did not disclose terms.

Jefferies and Co. analyst Arthur Henderson said he thinks Walgreen and Express Scripts will soon reach a new agreement.

"The companies are simply too large not to do business with each other so it seems likely to us that a deal will be reached within the next several weeks so as to limit any disruption to mutual customers," he wrote.

Deerfield, Ill.-based Walgreen also reported that its 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.

Quarterly results included a penny per share in restructuring costs. Analysts expected earnings of 62 cents per share on average, according to FactSet.

Revenue climbed to $18.37 billion from $17.2 billion.

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