How will the Express-Medco merger impact Walgreen?
The drugstore chain hopes to maintain its relationship and existing long-term contracts with Medco.
Walgreen walked out of Express Scripts (ESRX) network last year because of disagreements on reimbursement rates, losing more than $4 billion worth of business. Is it at risk of losing even more prescription business now that Medco will be folded into Express Scripts?
During the latest earnings call, Walgreen's management said it hopes to maintain its relationship and existing long-term contracts with Medco, unless the new company took "an extraordinary action" to terminate the existing contracts or significantly modify the terms of the agreements.
Meanwhile, there are fresh rumors that Walgreen may also enter into a fresh deal with Express Scripts soon, which would definitely be good news for the drug retailer. (Read If Express-Medco Merge, New Walgreen Deal In The Offing?) Walgreen competes with CVS Caremark (CVS) and Rite Aid (RAD).
Express-Medco merger and implications for Walgreen
The merger of U.S.'s two largest PBMs, Express Scripts and Medco, has received the FTC approval despite anti-trust concerns. The resulting entity would now have around 34% market share, handling prescriptions for about 135 million customers. The consolidation would also greatly increase the combined company's pricing power vis-a-vis drug manufacturers and drug retailers.
In 2011, Walgreen parted ways with Express Scripts, citing long-term interest and not agreeing to lower reimbursement rates offered by Express, and letting go of filling more than 80 million prescriptions worth $4 billion business. With the merger appearing more and more likely, the market is now weighing the possibility that Walgreen will encounter a similar hostile reimbursement rate negotiation with Medco.
How much business does Medco bring to Walgreen
Medco represented around 125 million prescriptions for Walgreen in 2011, compared to 90 million prescriptions associated with Express Scripts. Overall, Walgreen filled close to 716 million prescriptions in 2011, with Medco and Express making up 17.5% and 12.5% of Walgreen's prescription market share during the year. This clearly means that Medco brings significant business to Walgreen stores.
The number of Medco's prescriptions filled at Walgreen stores, however, is likely to decline to 108 million prescriptions in 2012 and further shrink to 74 million in 2013 as some health plans like UnitedHealth Group are expected to migrate out of Medco.
Nonetheless, Medco is one of Walgreen's largest customers, and the drug retailer cannot afford to lose more prescriptions business. Some analysts also speculate that Walgreen may be contemplating a bid for Rite Aid to strengthen its bargaining position, though it may not happen anytime soon or at all. We don't have strong conviction on whether a bid will be made but note that consolidation and scale could help Walgreen's competitive position.
Management remains positive
Despite the risks, the company management hopes to maintain its relationship and existing long-term contracts with Medco and expects to see flexibility in retaining access to Medco's clients even after the merger. Based on its interaction with major health plans and employers, it believes that Medco's clients have greater control to keep Walgreen in their network than Express Scripts' customers.
We currently value Walgreen with a $35 Trefis price estimate of its stock, which is almost in-line with the current market price.
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.