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Walgreens stands firm in quarrel with PBM
December 22nd, 2011
DEERFIELD, Ill. – With no resolution imminent in its stand-off with Express Scripts Inc., Walgreen Co. said it's prepared to take a short-term hit rather than digest the long-term consequences of accepting the pharmacy benefit manager's contract proposal.
Walgreens on Wednesday shed more light on its efforts to move forward with Express Scripts, whose pharmacy provider network the drug chain will no longer participate in come Jan. 1. In reporting fiscal 2012 first-quarter results, president and chief executive officer Greg Wasson noted that the outlook for retaining prescription business at risk in the PBM dispute looks more promising.
"Over the course of the last several months, we have seen an increasing number of health plans and employers taking steps to ensure Walgreens will remain in their pharmacy networks," Wasson said in a statement. "In addition, we are in active negotiations with many more to provide access to Walgreens in their networks as soon as their contracts allow."
According Walgreens, more than 100 health plans, employers and other Express Scripts clients have informed the drug chain that they have changed PBMs or taken steps to maintain access to Walgreens pharmacies in 2012.
On Wednesday Walgreens reported that its plan to exit the Express Scripts pharmacy network cost 1 cent in diluted earnings per share (EPS) in comparable pharmacy sales and 1 cent per diluted share in related expenses for the 2012 first quarter. Walgreens said that based on its current estimates, and the assumption that it won't be in the PBM's networks as of Jan. 1, including for clients such as Tricare and WellPoint, the drug chain expects to achieve 97% to 99% of its fiscal 2011 prescription volume in fiscal 2012.
"We firmly believe that accepting their proposal was not in the best long-term interests of our shareholders."
— Greg Wasson, CEO, Walgreens
The company added that it hasn't made any assumption regarding the impact of the proposed merger of Express Scripts and Medco Health Solutions on its fiscal 2012 business.
"While we remain open to any fair and competitive offer from Express Scripts, we firmly believe that accepting their proposal was not in the best long-term interests of our shareholders," Wasson stated. "Therefore, we have begun to execute plans to achieve our cost of goods sold and SG&A reduction goals for operating without Express Scripts."
In the wake of Walgreens' first-quarter report, financial analysts gave mixed views about the extent of the impact of the PBM dispute on the drug chain.
"Odds of a contract agreement with Express Scripts are now dimmer, but downside risk may be less than feared as Walgreens appears to be on track or ahead of our assumptions for customer retention," Mark Miller of William Blair & Co. wrote in a research note released Thursday. "We expect sales and earnings will decline in the next quarter, but sentiment could shift favorably again as Walgreens regains more customers and as the generic lift builds during 2012."
Miller said Walgreens' prospects to keep Express Scripts-related business have improved. "When we reduced our EPS estimates in October, we assumed there would be no agreement with Express Scripts and that Walgreens would retain 15% to 20% of its Express Scripts' volume in 2012. We now believe that number could be closer to 25%, based on feedback the company has received from customers," he stated in his analysis. "We remain comfortable with our [EPS] estimate reductions of 30 cents for fiscal 2012 and 50 cents for fiscal 2013, which assumes that Medco is acquired by Express Scripts but that Walgreens would recapture a growing percentage of prescription volume in calendar 2013."
According to analyst Ross Muken of Deutsche Bank Securities, Walgreens executives may be underestimating the potential hit to the chain's EPS.
"Management stated that there had been no further progress in the negotiations and reiterated that the net EPS impact from Express Scripts could range from 7 cents to 21 cents (assuming business retention rates in the range of 75% to 25%). We contend that the near-term operating profit at risk is meaningfully higher than management's initial estimates, particularly given our view that the Express Scripts-Medco deal has a good chance of closing," Muken wrote in a report released Wednesday. "We contend that the EPS leakage could be as high as 76 cents over the next three years."
"We believe that other PBMs will keep winning back business from Express Scripts clients and they'll pay us fairly for what we do."
— Wade Miquelon, CFO, Walgreens
Muken said that assuming an Rx retention rate of 25% for Express Scripts and Medco in fiscal 2013 and 2014 — with a 75% probability of merger deal closure between the two PBMs — Deutsche Bank's analysis estimates a potential EPS impact to Walgreens of
28 cents in fiscal 2012, 29 cents in fiscal 2103 and 19 cents in fiscal 2014.
"The 25% retention rate is consistent with our view that most plans will be unlikely to contract directly with a pharmacy for prescription benefits (as it adds additional layers of complication) and that most customers will switch to an alternate pharmacy to avoid having to pay cash for their prescriptions," Muken explained.
Walgreens said Wednesday in its first-quarter report that for the rest of fiscal 2012 and in fiscal 2013, it aims to benefit from the introduction of new generic drugs, reduced SG&A expenses and the upcoming PBM selling season.
The chain noted that in next year's PBM selling season it expects to be part of nearly all PBM networks except those under Express Scripts. In a white paper released this week, Walgreens highlighted an employer survey it conducted with over 800 executives and managers involved in pharmacy benefit decisions. More than 80% of employers said they wouldn't exclude Walgreens from their network for less than 5% savings on their total pharmacy spend, and 60% of employers said they wouldn't exclude Walgreens for less than 10% savings.
"Walgreens believes the vast majority of employers value Walgreens and would require significant savings to exclude Walgreens from their pharmacy network," the company stated in the white paper. "In addition, we believe many employers who use Express Scripts have options in their contracts that could be activated in the upcoming months if access to Walgreens is not restored. Finally, pharmacy benefit managers like Express Scripts that do not include Walgreens in their networks may face a more challenging selling season in 2012 and beyond."
The drug chain added that the survey found that 60% of self-insured employers and 45% of insured groups would be less likely to choose or renew with Express Scripts as a result of Walgreens not being included in its pharmacy network.
"These results, and what we're seeing in the marketplace, confirm our confidence as next year's PBM selling season begins," Wasson commented. "We're already working with many health plans and PBMs who value the role Walgreens and community pharmacies play in lowering overall health care and prescription costs."
In a recent interview with Chain Drug Review, Walgreens chief financial officer Wade Miquelon said that the crux of the dispute is the retailer's decision to stick to its principles. Having owned a PBM business — Walgreens Health Initiatives, which in March was sold to Catalyst Health Solutions Inc. for $525 million — the company can recognize an unfair contract with a PBM, he said.
"That's been the issue," Miquelon said in the interview. "Not only have we received substandard payment from Express Scripts, but the offer they've made to us is even more substandard. Apart from the financial implications, it has all sorts of implications to all the other payers we work with, who we tell constantly that we treat everybody fairly."
Whatever the impasse costs Walgreens in fiscal 2012, "we think that's the worst hit we'll ever take because we believe that other PBMs will keep winning back business from Express Scripts clients and they'll pay us fairly for what we do," Miquelon said.
"It would be nice if we didn't have this dispute, but unfortunately we're in a situation where someone’s not paying us fairly. Ultimately, the only way we can handle it is to step out of the network."
GEOFF WALDEN contributed to this article.