(ESRX) Walgreen’s Terminates Agreement With Express Scripts

With just half a year left for the termination of the agreement, Express Scripts Inc. (ESRX) recently announced that Walgreen Co. (WAG) is not renewing its agreement with Express Scripts. In a move that has shocked Express Scripts, Walgreen will not be a part of Express Scripts’ pharmacy provider network, effective January 1, 2012.

The company believes that Walgreen’s current rates are not competitive as compared with its peers. In the coming few years the cost of non-specialty branded medications is forecasted to increase about 10% annually and cost of branded specialty medications is expected to jump more than 14% per year. If Walgreen does not agree to adjust its rates, the clients and patients will be burdened by the branded price inflation.

Moreover, more than $60 billion worth of branded drugs are expected to lose patent protection in the near term, which will lead to generic versions of those medications hitting the market. If Walgreen provides competitive rates, clients and patients will be able to reap the economic benefits of increased generic utilization.

Walgreen’s current proposal of not adjusting rates is directed towards making profits for itself. Further, Walgreen wants to decide which clients and members to serve in a bid to focus on the most profitable ones. Express Scripts believes that neither the network providers nor Express Scripts should control pharmacy benefit plan design. This should be solely done by plan sponsors in the best interests of their members.

Meanwhile, Express Scripts had requested to continue the same contract terms that were mutually agreed upon earlier.

We note, if Walgreen maintains its current stance, Medicare prescriptions filled by it would cost the federal government an additional $300 million. These prescriptions can be filled at more than 50,000 other pharmacies for a lower price.

Express Scripts believes that Walgreen will negotiate its terms going forward in order to provide optimal care at a reasonable and competitive rate in the US.

We currently have a Neutral recommendation on Express Scripts, which carries a Zacks #3 Rank (short-term Hold rating).

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