Walgreen's loss is CVS Caremark's gain

A continued dispute with pharmacy benefit manager Express Scripts may cause Walgreen to lose prescriptions and sales.

By Jim J. Jubak Jan 3, 2012 4:13PM
Image: Prescription medicine expenses © Don Farrall/Photodisc/Getty ImagesGood news for CVS Caremark (CVS) in the Dec. 21 bad news from Walgreen (WAG), the largest U.S. drugstore chain. (CVS Caremark is a member of my Jubak’s Picks 12-18 month portfolio.)

Walgreen reported earnings for the first quarter of fiscal 2012 of 63 cents a share. That was below the 67 cents a share expected by analysts. The bad news from Walgreen dropped the company’s share price by about 0.3% on Dec. 21.

The biggest factors in the miss were a delay in the onset of flu season -- which cut flu shots administered by the chain to 5 million through November from 5.6 million in the same period in 2010 -- and Walgreen’s continued dispute with pharmacy benefit manager Express Scripts (ESRX). The two companies have not been able to resolve a dispute over pricing in a new contract. The old three-year agreement expired on Dec. 31, and it looks like Express Scripts will take much of its business to other drug store chains.

And that’s the good news for CVS Caremark. CVS shares are up 2.7% from the close on Dec. 21 to 1:30 p.m. New York time on Tuesday.

Exactly how much of Express Scripts $5.3 billion in annual revenue actually walks away from Walgreen after the company stops doing business with Express Scripts is still a huge unanswered question. Walgreen says that it will do enough business with Express Scripts by Dec. 31 to reach 97% to 98% of its fiscal 2011 prescription total in the fiscal year that ends in August 2012.

But Walgreen’s CFO has also estimated that the company will ultimately lose 26 million of the 88 million prescriptions it now fills for Express Scripts. Wall Street analysts say that Walgreen will lose most of its Express Scripts prescriptions and will also see a drop in sales of other merchandise as fewer shoppers go to Walgreen to fill prescriptions. According to CVS, 43% of its stores are within a mile of Walgreen stores. About 33% of Rite Aid (RAD) stores are within a mile of a Walgreen store.

The ripples of the Walgreen-Express Scripts dispute threaten to get even larger since Express Scripts has bid to acquire Medco Health Solutions (MHS), another big pharmacy benefits manager. An acquisition wouldn’t end Walgreen’s contracts with Medco immediately but the company would undoubtedly lose them over time.

My prior target price for CVS Caremark shares was $45 as of October 2012. As of Tuesday, Jan. 3, I’m raising my target to $46 by October 2012.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of CVS Caremark as of the end of September.  For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: WAG
72Comments
Jan 3, 2012 7:29PM
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I work for a small, independent, family owned pharmacy.  These huge pharmacy chains could put us out of business, and with medicaid cuts coming around the corner, it just might happen.  I would encourage any of you to try getting your prescriptions from a similar pharmacy for a few reasons.  The most important reason, customer service.  The reason CVS & Walgreen's and WalMart haven't caused us to close our doors is due to the personal customer service we give our customers.  We know them, we know their families.  Multiple generations continue to patronize us for the excellent customer service we give.  Our prices are comparable to the big chains, we accept all types of insurance, and our customers don't have to wait forever to get a script filled.  We also deliver to our customer's homes or workplaces.  Every customer is appreciated and valued in my pharmacy.  We have all the benefits and none of the problems of the big chain pharmacies.  Give your local, independent pharmacy your business and I bet you will be very happy!!!
Jan 3, 2012 7:01PM
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I had to switch to CVS from Walgreen's because of my insurance company.  I'd rather be with Walgreen's.  I don't like the product selection at CVS.  Walgreen's is better. 
Jan 4, 2012 1:39AM
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I was a store manager for both Walgreens and CVS over a span of ten years before leaving the pharmacy business to start my own company.  Having worked for both I can honestly tell you Walgreens is a much better run operation, there just isnt any comparisions.  Walgreens back office systems are better, pharmacy systems are better, training is MUCH better, staffing levels are MUCH MUCH better.  If you take a close look at CVS performance over the past few years you will see a company that hasnt really invested alot into its stores.  Sears was recently ranked last in investment into its stores and it was stated that this course of action was evident in the tired, dirty and outdated appearance of there stores, no to mention they now find themselves fighting off bankruptcy.  CVS, while not last, isnt to far off the mark.  A little closer look and you will see how the company has shed payroll bringing the stores to a point where there is only an assistant mgr and one clerk working at any given time, this is a customer service killer and more importantly a morale killer.   
Jan 3, 2012 11:33PM
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I;m currently a store manager for a Walgreens store and have been for ten years.  I cannot reply to every comment I've read, but I can clear up a few things:

 

1) Walgreens automatically changes to generics whenever allowed by the prescriber to lower costs for all parties involved.

2) Walgreens fills 90-day prescriptions to save the patient money when allowed by the prescriber and insurance carrier.

3) It is most managers' goal to provide the best service they possibly can with the technicians and pharmacists they have.  A service-driven pharmacist and/or technician can make ANY pharmacy (Walgreens, CVS, independent, etc) the most empathetic, caring, trustworthy pharmacy anywhere.  I have managed the best pharmacy at times and the worst pharmacy at times, all due to my technicians/pharmacists and how much they care for people, which is why I, and most of my peers, do our best to take care of these employees, because they take care of us.

 

In times like these, the staff doesn't have loyalty to Walgreens or CVS or Walmart, but loyalty to their spouses and kids, knowing that as corporations have to make tough choices about cutting patients' choices and employees' hours, these fine people have to do what they can to guarantee there'll be food on the table every night.  I tip my cap to the independents and pharmacy staves everywhere, of any denomination.  The pharmacy business is stressful and confusing, but is the difference for many people between life and death, for patients and employees. 

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I love Walgreen stores.  I lived in Cincinnati, and used the Walgreens in Norwood.  Moved to Columbus in 2000, there were no walgreens here then, I had such a hard time getting my prescriptions filled that I called the walgreens in Cincinnati and they sent my meds. free until they build the first one here on Morse & Cleveland Ave.  The employees are very friendly & helpful.  I now use the walgreens in Whitehall.  I know most of the employees, and the pharmacy staff, we are on a 1st. name basis,  and if I have a question about my insurance or a certain prescription, the pharmacy staff will always take the time 2 explain & help with any problem I might have.  I feel special knowing that I receive the same respect as when I was dealing with the store in Norwood.  All walgreens staff that I have dealt with are friendly & courteous.   I will never go 2 any other pharmacy.   I have my family and friends using Walgreens.  You can find a variety of things in the stores & at a reasonable price.   I'm a Walgreens fan for life.
Jan 3, 2012 7:07PM
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I'm a diabetic and have been getting my prescriptions at CVS.  At first, they were pretty bad, but in the last year, they have improved greatly.  The thing that turns me off about CVS, and an area where I believe Walgreens has a huge advantage, is in the products, outside of the pharmacy, that they stock.  The stuff at CVS is way over-priced, absolute garbage.  It makes finding anything to spend rewards card bucks on a real challenge.  On the other hand, it appears that Walgreens still takes pride in stocking reasonably-priced, decently made items.
Jan 3, 2012 10:20PM
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Use your local independent pharmacy instead of these big chain pharmacies - you will get better service while supporting your local community, not to mention keeping the big chains honest by keeping their competition healthy.
Jan 4, 2012 10:38AM
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It is all about GREED! Walgreen's disagree's with ESI price gouging their prescriptions. Example in a small town a script costs $4, in a city same script will cost $14 in say New York City same script will now cost you $40. I am with Walgreen's they wanted straight across price charging for all medications, ESI said NO. As far as insurance company benefits, you have to ask your Pharamacist which is cheaper to buy your medications out right or use insurance, it is not the pharmacy charging you $15-20 co-pay it is your insurance company ripping you off. Have a wonderful day :) 
Jan 4, 2012 4:15AM
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In 2003, I purchased my mother's alzheimers meds at CVS (4 different locations). Each store charged me a slightly different price.  I had assumed for the same meds they would charge the exact same price. Not so.  I asked CVS if there was a generic available for one of the meds.  Was told "no" .  My  mother did not have drug coverage when she was diagnosed with alzheimers.  Her meds cost $750.00/$800.00 a month depending which CVS stores I went to.  So I shopped around.  First thing Walgreens did was tell me about the available generic.  And, I found out the generic had been on the market the whole time I had been purchasing from CVS. What bothers me is I wasted $1,500.00 on one drug alone over a ten month period.  That one Walgreens store that told me about the generic, allowed me to put 70 new mattresses on metal frames for street children now living in an orphanage in Kenya Africa. Go Walgreens!  You are one good pharmacy.
Jan 3, 2012 8:09PM
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Express Scripts is the WORST company in the world to deal with (I am in a position where I get complaints about them daily - they lost the Dr's prescription, they never shipped the drug, they shipped it in extreme heat, and it was supposed to be refrigerated, and the list goes on and on). I hope they get the worst part of this dispute, but I have a feeling it's Walgreens that's going to suffer.
Jan 4, 2012 11:31AM
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Of all the comments posted, I have yet to hear the most important choice an individual can make in choosing a Pharmacy and Pharmacist.  As an Independent Pharmacy in a small rural community we have to compete with the likes of Walgreens, Wal-Mart, Rite-Aid, etc., and are still able to fill more prescriptions than any of them despite our shorter hours.  We do this through service, which starts with our employees.  We pay our employees more than the chains and can therefore choose the best employees.  We know most of our regular customers by name and consider many to be a part of our extended family.  Price is not an issue for most people since most patients have some sort of prescription drug coverage.  We always make a point to tell them when our cash price is lower and encourage the use of generics when available.
Jan 3, 2012 7:29PM
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The PROBLEM,not that investors like Jubak would care,is that CVS has become a True MONOPOLY within the retail pharmacy industry,already driving Independent Pharmacies out of business with exlusive contracts,making people use their mail order OR CVS stores to get Rxs filled. The scope of the problem is only being seen now with large chains experiencing the same UNFAIR business tactics with CVS Being allowed "exclusive contracts" dealing only with themselves. they now dictate reimbursements to all pharmacies because they OWN the insurance company!,  and belive me there is alot of profit shifting that takes place in this situation. 

Jan 4, 2012 1:26PM
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The CVS store here closes the pharmacy at 6:00 at night. Kroger and WalMart do the same. Walgreens is open 24 hours a day. Want a flu shot at 2:00 in the morning? You can usually get it at Walgreens. Their service overall is ten times better than Kroger, WalMart, etc. As for CVS Caremark? Their service is awful and I won't set foot in there if I can help it. Go Walgreens!!!
Jan 3, 2012 9:46PM
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cvs is the worst will never go there again. walgrens is less expensive and i dnt have to wait to get my prescription filled.
Jan 4, 2012 10:36AM
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I know it varies from store to store, but the pharmacy at the walgreen's I used was always efficient and helpful even though they were always busy.  Thanks to losing the express scripts service, I'm now using the CVS across the street from walgreens and it always seems as if I'm bothering them when I get my prescriptions filled.  The clerks are young and seem sluggish, as if waiting for a better job to come along.  Hopefully that next job won't be in customer service.  Thing is, they're never busy!!  I won't use walmart, that is like a cattle farm.  Maybe I'll try the supermarket pharmacy next.
Jan 4, 2012 11:40AM
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My company has Express Scripts for our prescription coverage and they have by far the WORST customer service I have ever experienced in this type of coverage.  They deny prescriptions for being "written wrong", do not use due diligence to follow up with physicians, and are extremely slow.  Everyone in my office has had trouble with their prescriptions.  Express Scripts sucks.
Jan 4, 2012 12:15AM
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And aside from the Pharmacy...Walgreens has better product selection and isnt too over-priced like CVS
Jan 3, 2012 10:18PM
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The problem lies with the contracts the PBM's make with the chains. Why don't all pharmacies get the same contract? The customer can go where they want! Novel idea? The PBM's , insurance companies and drugstore chains have turned this part of the healthcare system into a travesty. Now we have CVS owning/in cahoots with a PBM.... Caremark.  PBM's (in the 7 legal issues listed in Wikipedia, PBM's have been fined a half BILLION dollars in fines for criminal,civil and fraud cases) are the cancer of the healthcare system. Americans who have health insurance with many companies are not allowed to choose their pharmacy. They are sometimes forced to use mail order pharmacies. If they are not forced outright, many customers have financial disincentives to not shop locally. The victims: the insured and the local independent pharmacies. To take this absurdity further, how many people who pay for their drug insurance have been told they may not have the medicine their doctor prescribed? Why? The insurance company won't allow you to have what your doctor wants you to have. The ACCOUNTANTS are deciding your drug therapy!!!!  Frustrating isn't the word for this....
Jan 3, 2012 11:37PM
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I miss Walgreen's so much! It's only been two months of dealing with ghetto CVS and I am sorely disappointed. I wish Express Scripts had been able to work something out with Walgreen's. The service is just NOT the same. It's the little things that make the difference. I never had any problems with Walgreen's. I've already had problems with CVS! I put up with it because I have $0 copay. I wish there was an alternative and I hope Express Scripts and Walgreen's can work things out in the future! Bad move for both!!
Jan 4, 2012 12:45AM
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Walgreens is the bestPharmacy I have used since we my husband retired from the military. I will not shop at CVS, and I didn't want Express Script s because it is left in the mail box for one reason and the other is that if you have to change medications, you cannot get it the same day it is changed. Will someone please tell me why the government gets involved in where we get our medications.?  Best they keep the Pharmacies that are the best. A friend of mine got the wrong medication from CVS and had she taken it, it could have killed her. This isn't the only complaint I have heard about. Walgreens is always so helpful and yes much cleaner than other places. You don't have to wait forever to get your medication. I keep praying something will change. 

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