3/27/2012 6:54 PM ET|
Why Walgreen is under the weather
The nation's largest pharmacy chain is fighting with a drug insurer in a spat that means you might have to take your prescriptions elsewhere. That makes it an intriguing play.
The nation's largest pharmacy has run into a competitive wall that's hard to miss if you're a shopper or a shareholder.
First, many faithful customers whose families have shopped at the retailer for generations have learned over the past few months that they can no longer fill their prescriptions at Walgreen's -- at least, not if they want their insurance to cover it.
Second, Walgreen shareholders need a prescription for pain relief. Despite the stock market's recovery, Walgreen shares are down 24% since trouble began last summer.
What's the problem?
In short, behind the scenes there's a big-money battle playing out in the pharmacy world that could change where you get your prescriptions filled. It is reshaping who profits from the huge prescription drug industry. And Walgreen, a storied brand and part of Americana, is at the center of it.
Here's a look inside this the prescription drug fight, and how it might turn out for Walgreen -- which is, after all, the sort of iconic stock that investors often do well buying when down, because the name helps it bounce back.
The contestants, old and new
In one corner, you have Walgreen's, which has been filling prescriptions since 1901. Over more than a century, it has become one of America's favorite retailers.
In the other corner, you have the relatively new middlemen of meds known as pharmacy benefits managers, which got started in the 1980s. PBMs pool the health insurance needs of private companies, governments and unions to increase their bargaining power with drug companies and lower the cost of medications.
They also bargain with pharmacies to determine whom to invite into their networks -- and at what share of the proceeds. And one in particular, Express Scripts (ESRX), has been squeezing Walgreen.
Last summer, Express Scripts offered the chain a much-less-favorable revenue split than it was used to. Walgreen declined. Shortly after, things got worse for the drugstore chain when Express Scripts announced plans to merge with Medco Health Solutions (MHS). That's another large PBM, and another huge Walgreen partner.
Seeing the writing on the wall -- the potential loss of both Express Scripts and Medco customers when contracts with Walgreen eventually expired -- investors fled Walgreen stock over the summer. From a peak above $45 in May, shares traded into the low $30s.
After that, the stock drifted in the $32 to $34 range as investors braced for what was about to happen: the expiration of Express Scripts' contracts with Walgreen at the start of 2012.
This year, Express Scripts has been shifting customers to other pharmacies -- which means they can no longer have their prescriptions filled at Walgreen's if they want insurance to cover them. If the Medco merger goes through, the same may well happen with Medco customers.
This battle has scared investors and Wall Street analysts away from Walgreen stock. But that makes it an intriguingly inexpensive -- if somewhat risky -- contrarian play. The bottom line is that even though things look bleak, Walgreen has the strength to fight back.
"Walgreen is a top pick," says Andrew Wolf of BB&T Capital Markets, one of the few Wall Street analysts with a "buy" rating on Walgreen stock. Walgreen stock trades at a 20% to 30% discount to CVS Caremark (CVS) and Rite Aid (RAD) by some valuation metrics, he says. "Most of the bad stuff is priced in. If anything good happens, the stock is going up." Wolf has a 12-month price target of $46 on Walgreen stock, which recently traded for about $34.
How Walgreen could win
What could go right from here? Analysts cite three things.
1. Walgreen uses its clout to fight back.
Walgreen still has many strengths, starting with decades of customer loyalty and a huge presence on the retail scene. It fills 21% of prescriptions in the U.S. It is such a fixture in some places, including its home turf of Chicago, that customers refer to it as "my Walgreen's."
Walgreen could well draw on that customer loyalty to turn the tables. If enough Walgreen's customers complain about being forced to go elsewhere, and the employers who work with Express Scripts and Medco sound off, too, the PBMs would find themselves in a tough spot.
Thus far, this isn't happening. Since Walgreen and Express Scripts parted ways at the start of the year, Walgreen has retained far fewer pharmacy customers than it said it might.
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Tricare should drop Express as their PBM. Worst customer service ever. They could care less about all those vets they cover. If they would offer a decent reimbursement rate, there would be no issue.
Not to defend Walgreens cause they suck almost as bad, but I guarantee you that a bunch of accountants determined keeping on with Express would lose them money. I am pretty sure Walgreens is only refusing Express customers based on the bottom line. No one wants to lose money.
Insurance companies & PBMs are what is wrong with the American health care system.
when I changed my insurance to Blue cross Walgreens does not accept blue cross anymore but when i went to a different Pharmacy the prices were cheaper. So I far as I am concerned if Walgreens does not want to pass the savings on to its customers then they will be out of business soon.
We lost Thrifty, then Long;s which had similar operations to Walgreens and Rite Aid. Both of these chains are doomed to extiction due to both Wal*Mart and Target where generics are cheaper. The biggest problem at either Wal*Mart or, especially, Target is that the help they hire have IQ's in the low 30's and are just as likely to give you someone elses prescription as your own. They have just as much education as the kid that screws up your order at the fast food drive thru, and are just as likely to screw it up.
My wife gets her prescriptions filled at Target. The workers there have:
1. Given her someone elses bottle in her bag.
2. "Lost" a prescription because no matter how many times I spelled the last name, they looked in the wrong rack.
3. Put the wrong pills in her bottle.. ( We do not know what they were.)
4. Failed numerous times to get the prescription cleared through the insurance because of clerical errors.
5. Misspelled our 6 letter last name many times such that the prescription was "lost" and could not be found.
Walgreens and Rite Aid may be a little more expensive, but the people who work there can actually spell the word "prescription."
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