The long-standing impasse between
Express Scripts Inc.
) came to an end on a positive note with both the companies
announcing a multi-year pharmacy network agreement. Following the
culmination of this seven-month old dispute, the investors heaved a
sigh of relief as the shares of Walgreen shot up 12% to $34.2 while
a 2% increase was witnessed for Express Scripts shares to $58.76,
at the close of trading yesterday.
Financial terms of the multi-year agreement have not been
disclosed. However, per the settlement, September 15, 2012 onward
the pharmacy network of Walgreen will start filling prescriptions
from Express Scripts customers. With the addition of the retail
giant to its network, Express Scripts will extend its services to
over 64,000 pharmacies across the US.
The Walgreen-Express Script clash came to the fore in December
last year and consequently, Walgreen terminated its contract with
Express Scripts from January 1, 2012. Ever since, the 7,700
pharmacies of Walgreen were no longer a part of Express Scripts'
pharmacy provider network that adversely affected the company's
Walgreen's client list got considerably reduced as major clients
like Tricare and WellPoint moved away. Even, during the last
reported quarter, this impasse had a negative impact of 6 cents per
share on Walgreen's bottom line.
This was not the end of the woes for Walgreen. The mega-merger
between Express Scripts and Medco Health Solutions in April this
year, further intensified the competitive landscape in the PBM
industry and put Walgreen in a tight spot.
However, the scenario is expected to improve radically with the
latest deal between these two stalwarts. Following the recent
agreement, we believe that Walgreen is poised to compensate for the
losses incurred since the termination of the previous deal.
Meanwhile, rival PBM companies like
) were distressed following the resolution of the dispute between
Walgreen and Express Scripts. Their share prices moved downward by
more than 6% as they benefited from the impasse.
During the first quarter of 2012, CVS Caremark delivered huge
retail growth as it benefited significantly from the company's
record market share gain, following the termination of the Express
Scripts and Walgreen contract. This led to a 350 to 400 basis
points (bps) increase in CVS' pharmacy same store sales, leading to
roughly 5.7 million to 6.5 million of prescriptions filled.
Also with the benefit of additional prescriptions resulting from
the Walgreens-Express Scripts dispute, Rite Aid's number of
prescriptions filled in same stores increased 3.0% in the first
quarter of 2013.
CVS Caremark is optimistic about a benefit of 5 cents per share
related to the additional business gained from the Walgreen-Express
Scripts conflict in the third and fourth quarter of 2012 and also
expects to retain at least 50% of the business gained from the same
through the fourth quarter 2012. However, we prefer to remain on
the sidelines until more visibility is obtained in this regard.
We are encouraged with the resolution of the Walgreen-Express
Scripts impasse. The latest agreement between the two PBM giants
indicates that both of them are mutually beneficial and we expect
their association to continue in the future.
Walgreen currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. We maintain a long-term Neutral
recommendation on the stock, at par with Express Scripts, CVS
Caremark and Rite Aid.
CVS CAREMARK CP (CVS): Free Stock Analysis
EXPRESS SCRIPTS (ESRX): Free Stock Analysis
RITE AID CORP (RAD): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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