With the news of a contract accord between Walgreen Co. and Express Scripts Inc., CVS Caremark Corp. raised its projected earnings benefit from the impasse between the two rivals.

CVS Caremark, Walgreens, Express Scripts, earnings benefit, PBM, pharmacy benefit manager, Larry Merlo, CVS/pharmacy, prescription business, Russell Redman, Mark Miller, William Blair & Co., prescriptions, contract impasse, Walgreens-Express Scripts dispute

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CVS reckons gain from Walgreens-ESI standoff

July 19th, 2012

WOONSOCKET, R.I. – With the news of a contract accord between Walgreen Co. and Express Scripts Inc., CVS Caremark Corp. raised its projected earnings benefit from the impasse between the two rivals.

Walgreens and Express Scripts announced Thursday that they have agreed on a multiyear contract that will bring the drug chain back into the pharmacy benefit manager's network starting Sept. 15.

CVS Caremark, which operates chain drug store and PBM businesses, had gained customers from both Walgreens and Express Scripts during their six-and-a-half-month standoff, in which Walgrens exited the Express Scripts pharmacy network on Jan. 1.

"CVS Caremark is now better able to clarify what we believe will be the overall estimate of the impact from the impasse for the remainder of 2012," CVS stated Thursday.

"Given that the impasse is expected to last for nearly nine months and that [CVS Caremark] expects to retain at least 50% of the business gained from the impasse in the fourth quarter," CVS explained, "the company now expects an additional benefit from the impasse in the third and fourth quarters combined of approximately 5 cents per share."

For CVS Caremark, the Walgreens-Express Scripts situation added earnings per share (EPS) of 3 cents in the first quarter, and CVS has forecast a gain of 3 cents to 4 cents in the second quarter.

"We're taking this Walgreens-Express Scripts benefit one quarter at a time," CVS Caremark president and chief executive officer Larry Merlo said at the company's annual shareholders meeting in May.

In discussing robust sales and earnings gains for the first quarter ended March 31, Merlo cited CVS/pharmacy's deft response to the dispute between Walgreens and Express Scripts, which generated significant new prescription business.

"Our retail team has done an outstanding job in capitalizing on this opportunity," he said at the meeting. He noted that more than 40% of CVS stores are within one mile of a Walgreens, and around 80% are within three miles of a Walgreens store.

According to analyst Mark Miller of William Blair & Co., CVS likely will hold onto more of the prescriptions it added from the Walgreens-Express Scripts dispute than it has projected.

"CVS also noted in Thursday's release that it expects to retain at least 50% of the prescriptions in the fourth quarter that it gained from Walgreens this year," he wrote in a July 19 research note. "We believe this estimate is reasonable, and likely conservative, as the dispute forced customers to find a new network, whereas the resolution is not a similar catalyst for action since those customers are not being forced to switch."

In his analysis, Miller said CVS had estimated that it could pick up 16.9 million to 23 million prescriptions from Walgreens this year if the contract impasse wasn't resolved.

"We believed that this outlook was conservative, as the 6 million prescriptions captured in the first quarter was a higher run-rate," he stated. "With the dispute now resolved, and the company estimating 50% retention, we believe the company will have captured more than 15 million scripts by Sept. 15, when the [new Walgreens-Express Scripts] agreement goes into effect, and will retain an estimated annual run-rate of roughly 8 million scripts in the fourth quarter."

*Editor's Note: Article updated with analyst comment.