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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We have about 5 Walgreens in our town, and I have never seen the parking lot full. If you want to look for the problems with Walgreens, you only have to enter the front doors.
My Mom was on Express Scripts, through TriCare. When Express Scripts pulled their contract from Walgreens, Walgreens sent a letter out asking past users to write to Express Scripts. We didn't. Wy not? We found that Walgreens was charging double the price for prescriptions than the local Wal-Mart, or other pharmacies. On top of that, with 8 people behind the counter, it was taking us (and I am not exaggerating) hours to get a prescription filled. It did not matter if you called ahead, or your doctor ordered; they would make you wait forever for pick up.
We quit using Walgreens years ago.
If you have lousy prices and lousy service...then you get a lousy customer base.
Personally speaking, service has been very good to me, overall! I'm not gonna whine about some tiny slight or try to imagine something so neglible that I have to exaggerate to make it plausible.
America is a nation of arrogant, and spoiled whiners...!
Maybe it depends on what part of the country your Walgreens is in. Or, the problem might be seen in your mirror.
Yes, some of thier prices are too high, while others are priced just right, depending on the merch.
I agree that Walgreens has the WORST customer service.
An employee yelled at me in front of other customers when I asked about a bag of potato chips. She said she was going to ask a manager, walked behind an aisle, then reappeared 3 seconds later, and said the manager had the same answer she did...I seriously doubt she spoke to anyone but herself int he 3 seconds she was gone.
Walgreens has lousy customer service, just plain rude. My husband has to take 9 prescriptions.
They NEVER get it right. We went to another Pharmacy and they are so nice to him.
My husband called their Corporate office to complain...lasted 2 month and they were back
to their old ways.
Are they so worried about the stock that they can't see the people in line to buy?
I quit Walgreen's a long time ago. Took FOREVER to get a prescription filled. Never had the medication in stock, even when I asked them to stock it. They would NEVER offer to check to see if other stores had the medication in stock, I always had to pester them about that.
Customer Service is terrible. Down right rude. Takes forever to get through the drive through. Living in a major metropolitan city, they could care less. While they offer 1 hour prescriptions, they seem to never have enough staff to get a Rx filled in an hour.
I just walked across the street to CVS, and now, no pain no strain. CVS has modern, clean stores, and the pharmacist is ever so helpful. Even wrote on my last prescription to counsel me on thyroid medication due to recent cancer. Was ever so grateful.
I used to go to walgreens and pay 25.00 for most of my scripts... someone told me about costco... yes you have to have a membership as i do, but now all i pay is 2.40 a script... i call it in and my meds are ready in 15 minutes and i sure as hell dont have to wait in line to pick them up...
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