Walgreens discontinues negotiations; PBM Express Scripts shocked

ST. LOUIS — After Walgreens made its contract dispute with Express Scripts public on Tuesday morning, the pharmacy benefit manager stated it is open to continued negotiations with Walgreens.

"In these challenging economic times, it is critical that we all work together to keep medicines affordable and accessible," Express Scripts' chairman and CEO George Paz said. "It is shocking to us that Walgreens would back away from the table with six months to go in the current agreement, especially considering that negotiations are part of the normal course of business."

In response to the news, Credit Suisse research analyst Ed Kelly said that the general consensus is that the issues will be settled.

“Walgreens is once again fighting to protect the longer-term profitability of its pharmacy business, similar to the dispute with CVS Caremark last year,” Kelly wrote in a research note released Wednesday morning. “We believe the company’s dispute with Express Scripts will be resolved shortly, as the lack of a deal would clearly harm both companies.”

If renewed negotiations don’t materialize, the parting of ways between Walgreens and Express Scripts would have an estimated 50 cents per share impact on Walgreens’ earnings, Kelly noted, and Express Scripts would be placed at a competitive disadvantage versus other PBMs without the almost 8,000 Walgreens and Duane Reade pharmacy locations in its network.

Credit Suisse maintained its “outperform” rating for Walgreens, suggesting that investors taking advantage of any volatility with stock prices now should reap the benefits by first quarter 2012 if Walgreens hits current earnings projections.

In its statement, Express Scripts challenged Walgreens’ assertion that the proposed reimbursement rates were below the published industry average cost to provide each prescription. “Over the next three years, the costs of nonspecialty branded medications are projected to increase approximately 10% per year [and] more than 30% over three years. The costs of branded specialty medications are projected to increase more than 14% per year [and] nearly 50% over three years, and more than $60 billion worth of branded medications will lose patent protection, opening the door to more affordable generic alternatives,” Paz stated.

However, the PBM is drawing its own line in the sand in preparing to continue on without Walgreens. “On average, another pharmacy within the Express Scripts network is within one-half mile of a Walgreens pharmacy. Even without Walgreens in our network, we meet all client guarantees for access.”