Walgreen Co. outlined some of the potential impact of its contract stand-off with Express Scripts Inc. in a quarterly filing with the Securities and Exchange Commission.


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In SEC filing, Walgreens reports on status of PBM dispute

December 29th, 2011

DEERFIELD, Ill. – Walgreen Co. outlined some of the potential impact of its contract stand-off with Express Scripts Inc. in a quarterly filing with the Securities and Exchange Commission.

In the Dec. 29 10-Q filing, Walgreens reiterated estimates of the possible business hit from the contract dispute with the pharmacy benefit manager (PBM) that it gave last week in its fiscal 2012 first-quarter report, as well as recapped its efforts to retain prescription business related to the PBM. The drug chain as of Jan. 1 will no longer be part of Express Scripts' pharmacy provider network.

Walgreens didn't provide any further guidance in the SEC filing on the potential fiscal 2012 earnings impact from the contract impasse. But in the 10-Q report, the drug chain conveyed the uncertainty surrounding its efforts to mitigate the possible fallout, including initiatives to retain business from Express Scripts clients, expand business with other payers and customers, and pare costs.

"There can be no assurance, however, that for the portion of fiscal 2012 beginning January 1, 2012, we will retain any particular level of business from Express Scripts' clients, and if we were to lose more than 75% of such business it is uncertain whether we would be able to offset as much as 50% of the reduction in gross profit resulting from the marginal loss of such business above 75%," Walgreens stated in the SEC filing.

The chain also noted that the planned merger of Express Scripts and Medco Health Solutions Inc. could bring further financial consequences. The PBMs' merger deal, announced in July, is currently being reviewed by the Federal Trade Commission.

"If the merger is successfully completed, we may face additional reimbursement pressure or potential loss of business," Walgreens' 10-Q report said. "Because the Express Scripts/Medco merger remains under review, we have made no assumption regarding the consummation, timing or impact of the merger related to our business for fiscal 2012."

In fiscal 2011, Express Scripts processed about 88 million prescriptions filled by Walgreens, or roughly $5.3 billion of its sales, the drug chain stated in the SEC filing. And for the first four months of fiscal 2012 ending Dec. 31, Walgreens estimates that Express Scripts will have processed 26 million prescriptions filled by the chain.

Walgreens reported last week that its plan to exit the Express Scripts 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 fiscal 2012 first quarter.

In late September, as part of its fiscal 2011 fourth-quarter report, Walgreens gave three scenarios of the potential fiscal 2012 earnings hit from the PBM dispute: a loss of 21 cents in diluted EPS if it retains 25% (or $1.3 billion) of Express Scripts-related prescription sales, a loss of 14 cents in diluted EPS if it retains 50% ($2.6 billion), or a loss of 7 cents in diluted EPS if it retains 75% ($4 billion).

"In addition to the approximately 2 cents net earnings per diluted share adverse impact in the first quarter of fiscal 2012 resulting from a loss of pharmacy sales and expenses related to our dispute with Express Scripts, this development is expected to adversely affect our net sales, net earnings and cash flows during the remaining portion of fiscal 2012 beginning January 1, 2012, when we are no longer part of the Express Scripts pharmacy network," Walgreens stated in the Dec. 29 10-Q report.

Walgreens said that as of the date of the SEC filing, more than 100 health plans, employers and other Express Scripts clients have informed it that they have changed PBMs or taken steps to maintain access to Walgreens pharmacies in 2012, which the chain estimated will result in the retention of about 10 million prescriptions beginning Jan. 1.

"We also expect to learn of additional retained prescriptions once information regarding Medicare Part D elections and small plan renewal decisions becomes available in 2012," Walgreens stated in the filing.

Walgreens reiterated in the 10-Q report that based on its current estimates, and the assumption that it won't be in the Express Scripts 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.

And as previously reported, Walgreens stated that it's implementing plans to offset about 50% of any reduction in fiscal 2012 gross profit resulting from a loss of up to 75% of the business from Express Scripts clients, mainly via cuts in selling, general and administrative (SG&A) expenses and cost of goods sold. The pharmacy retailer noted that it expects "a substantial majority" of those reductions to be realized in the fiscal 2012 second half.

"While we cannot predict what percentage of business we may retain or regain from these and other entities and groups that were Express Scripts clients in fiscal 2011 in any particular future period," Walgreens said in the SEC filing, "over time we believe employers and others will want plans with Walgreens in the network."

In a recent interview with Chain Drug Review, Walgreens chief financial officer Wade Miquelon expressed the company's confidence in the value that it offers to employers, health plans and consumers. "Our belief is that with who we are today and also where we're going in order to dramatically improve the customer/patient experience, most payers and people are going to want to be able to go to Walgreens, especially when there's no significant savings for them not to," he said.

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