The termination of the
Express Scripts
(
ESRX
) contract continues to hurt Walgreen (
WAG
) sales which led to a frail start for Walgreen's third quarter
2012. For the month of March 2012, the company recorded a 4.3% dip
in year-over-year sales to $6.02 billion. Although total front-end
sales witnessed a modest increase of 2.5% with 1.2% rise in
comparable store front-end sales, customer traffic in comparable
stores fell 1.0%. Simultaneously the number of prescriptions filled
by patients reduced drastically. On a year-over-year basis,
prescriptions filled at comparable stores were down 11.4%.
The Express Script contract loss, which used to contribute a
significant part of Walgreen's total sales (12.65% of total
prescriptions filled in March 2011), led to a negative impact of
10.7 percentage points on Walgreen's prescription filled.
Additionally, lower incidence of flu affected the prescriptions
filled by 0.7 percentage point.
All these directed to an 8.4% decline in Walgreen's total
pharmacy sales, which attributed the lion's share of the total
sales of Walgreen (63.5%) in March. There was 11.1% drag in
comparable store pharmacy sales for the month, owing to the
negative impact of Express Scripts contract loss (10.6 percentage
points), the introduction of generics in the last 12 months (2.5
percentage points) and lower incidence of cough, cold and flu
(0.9). Further, calendar day shifts negatively impacted
pharmacy sales in comparable stores by 2.1 percentage points and
total comparable sales by 1.3 percentage points.
Year-to-date, total sales rose 1.6% compared to the same period
last year. However, the first 4 months of the period included the
result of Express Script contract that was ended effective January
1, 2012.
Our Take
Amidst such a major contract loss, Walgreen remains optimistic
about its front-end store sales and with Easter on April 8, the
company assumes better sales performance for the next month. In
March, Walgreen opened 8 new stores including 1 relocation. At
March 31, Walgreens operated 8,300 locations in all 50 states, the
District of Columbia, Puerto Rico and Guam.
Meanwhile, Walgreen is expanding its business with other payers
and customers and implementing cost-control initiatives. The
company is reassured by the fact that more than 100 of Express
Scripts clients, encompassing health plans and employers, would
continue with Walgreen pharmacies in 2012. The company aims to
retain 10 million prescriptions annually and maintain 97-99% of the
2011 prescription volumes at fiscal 2012 end.
Earlier, in February, specialty pharmacy services provider,
BioScrip
(
BIOS
)
and Walgreen entered into a definitive agreement, under which the
former will dispense certain community specialty pharmacies and
mail service pharmacy business assets to Walgreens for $225
million. Walgreen anticipates the transaction to have no material
impact on its fiscal 2012 earnings. However, the transaction will
be moderately accretive in fiscal 2013.
Despite its best efforts to counter the loss of the Express
Scripts contract, which accounted for 7.3% of total sales in fiscal
2011, Walgreen's financials will continue to be affected by the
loss of the contract. We remain concerned regarding Walgreen's
continuous deterioration in the number of prescription filled
following the contract loss. We note that in January this year,
Prescriptions filled at comparable stores decreased 8.6% with
negative impact of 10.6 percentage points due to the contract loss.
Again the company witnessed a 9.5% drop in prescriptions filled in
February with 10.7 percentage points impact of contract loss. We
are highly anxious about this and expect the negative trend to
continue throughout fiscal 2012.
Under these circumstances, we currently prefer to remain on the
sidelines until more visibility is obtained. Walgreen retains a
Zacks #3 Rank (short-term Hold rating). We have 'Neutral'
recommendation on the stock over the long term.
BIOSCRIP INC (
BIOS
): Free Stock Analysis Report
EXPRESS SCRIPTS (
ESRX
): Free Stock Analysis Report
WALGREEN CO (
WAG
): Free Stock Analysis Report
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