The chart below highlights the ignominy of watching Rite Aid (NYSE:RAD) grow more quickly than Walgreens. That must hurt. Last December, Walgreen’s management presented rosy scenarios in which they retained as much as 70% of the Express Script’s business. My back-of-the envelope calculations suggest they actually retained about 15%.
Walgreen’s management is hoping for an unlikely miracle during the PBM selling season. When that doesn’t happen, expect some executive heads to roll and a deal to be made.
AND IT’S NOT EVEN 12/21/12 YET
The dispute began last June when Walgreens issued an odd press release announcing its plan to exit from the Express Scripts network. See Walgreen and Express Scripts Play Chicken. Express Scripts used the six-month (!) lead time to communicate excessively and directly with its plan sponsor clients. At the time, I assigned a 15% to “no agreement.” Oops.
For Walgreens, 2012 is starting to look like an early apocalypse. Here’s a look at the year-over-year change in same-store prescription revenues at Walgreens, Rite Aid, and CVS Caremark’s (NYSE: CVS) retail stores. (Note that CVS only reports on a quarterly basis, so I simply plotted the quarterly figure in each month for comparison.)
According to Walgreen’s press release:
“The negative impact on comparable store prescriptions filled due to no longer being part of the Express Scripts, Inc. pharmacy network was 10.7 percentage points. Prescriptions processed by Express Scripts comprised 12.6 percent of Walgreens prescriptions in April 2011.”Combining these two figure suggests that Walgreens retained only 15% of the Express Scripts business. As recently as a December 2011 earnings call, Walgreens management projected a retention rate as high as 70%. Here's how they arrived at that hopelessly optimistic scenario:
On the bright side, same-store prescription growth was positive, excluding the Express Scripts effect.
Many people, including me, are surprised that the dispute has lasted as long as it has.
Walgreens is clearly hoping that plan sponsors will pressure Express Scripts to cut a deal and keep the chain in the network. And as I note in Decoding the Clues to Express Scripts' Strategy, a small number of plan sponsors have been switching away from Express Scripts to keep Walgreens in their network. Most, however, appear to have accepted the change...for now. Here’s what Express Scripts wrote in its just-released Drug Trend report:
“One retail pharmacy chain, Walgreens, was unwilling to offer rates and terms consistent with those of the market, and instead opted to leave our pharmacy network at the beginning of 2012… As demonstrated by our successful transition of members from Walgreens to other pharmacies in early 2012, most patients understand the broad access available to them.”Other PBMs, such as SXC, seem intent on keeping Walgreens, in part as a differentiation vs. Express Scripts. See SXC CEO Mark Thierer’s comments in The SXC-Catalyst Merger: Initial Thoughts On the Deal.
It’s not clear what Express Scripts has offered its plan sponsor clients to make them satisfied (and economically comfortable) with the network change. I also don't see how Walgreens can remain in the Medco network for much longer without cutting a deal to remain in the Express Scripts network. On a Citigroup conference call last week, JoAnn Reed, former CFO of Medco, explicitly forecast that Walgreens will exit the Medco network.
Express Scripts reports earnings after the market close this evening and will host its earnings conference call at 9:00 AM on Friday. (Listen here.) Tune in for Q&A on the Medco network and the Walgreens negotiations.
I’m less certain than ever that Walgreens can win this battle. And even if they do sign a deal, it will take years to recapture lost business. Many consumers are probably gone forever.
So, what is Walgreen’s board thinking? How far will they let this dispute go? And, which execs will be sacrificed to get the inevitable deal done, before Walgreens drives itself over a cliff?
More than 10 years ago, Walgreens was anointed a "Good to Great" company, along with Fannie Mae and Circuit City. Here's a popular song from that golden era.