Around a year ago, the ongoing contract negotiation between Express Scripts (ESRX) and Walgreens (WAGS) promptly ended when Walgreens issued a press release stating that they would not accept Express Scripts prescription coverage after the end of 2011. Walgreens was insisting the reimbursement offered was insufficient. As far as I know, Walgreens never actually said the contract Express Scripts proposed would be unprofitable; I believe they characterized the contract as providing “below market” reimbursement while attempting to imply that Express Scripts was low-balling them. Express Scripts, of course, stated the contract had standard terms. In rejecting the contract and saying they would leave the Express Scripts pharmacy network, Walgreens may have thought other pharmacies would join them in a protest against the ever-declining reimbursement rates in retail pharmacy. That notion obviously did not play out, and, instead, a massive exodus of customers flew out of Walgreen’s doors.
WAGS was alone among major pharmacy chains in declining to fill Express Scripts prescriptions; the campaign to encourage patients to demand Walgreens be in their pharmacy network produced little effect. There has been a widely reported number that come January 1st, Walgreens lost 85% of their Express Scripts covered prescriptions. Walgreens attempted to downplay the loss of these prescriptions throughout the negotiations, stating they expected prescription volume to be only slightly less in 2012 versus 2011. Express Scripts processes about 750 million prescriptions a year; with Walgreens handling about 90 million ESRX prescriptions a year, Walgreens is looking at a lot of lost revenue: over $4B. That’s over 5% of the company’s total revenue right there just in lost prescription reimbursement.
Looking at WAGS first fiscal quarter filings, which cover the quarter ending Feb. 29 thus including the month of December when the Express Scripts contract was still in effect, WAGS has lost over 7% in prescription volume compared to the previous year. Operating income for the quarter was down as well. A recent press released showed comparable store prescription numbers for May were down nearly 8% year over year, and one can assume this was highlighted because it is a brighter outlook than recent months. Taking these numbers into account, it doesn’t seem likely Walgreens can come within a couple percentage points of last year’s total prescription numbers.
For those in retail pharmacy, Walgreens actions during the negotiations with Express Scripts seemed quite peculiar. It is obvious to almost everyone that PBMs hold the bargaining power in today’s pharmacy landscape. How did the stock market react to Walgreens’ bravado? Well, WAGS is down nearly 28% in the past year. After the initial summer drop surrounding the Express Scripts news, WAGS traded in the low $30s for much of the latter half of 2011. Since then, it has slipped to $30.98, dropping over 6% in 2012 alone.
Express Scripts seems to have handled things a bit better. ESRX was also trading lower in the latter half of 2011 versus summer 2011, down from the mid $50s to just under $36. The key point here is that ESRX is currently trading at ~$53. The current price point is slightly below last year’s high, but the stock has been on a mostly steady march upward since the lows of early October. Due to a recent pullback and last summer‘s fall, the year over year return is about -7%, but the stock is up ~12.5% in 2012.
So who gained from those millions of Express Scripts prescriptions that Walgreens used to process? Well, CVS Caremark (CVS) is up 20% in the past year. Rite Aid (RAD) is up nearly 14% in the same period. One man’s loss is another man’s gain.
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