Walgreen Not Sweating Loss of Express Scripts Customers to CVS — Should It Be?

Absent a last-minute settlement, it's a good bet executives from Walgreen
(NYSE: WAG ) and Express Scripts (NASDAQ: ESRX ) won't be ringing in the new
year together. However, if the two companies can't get together, look for the
champagne to be flowing freely at the Woonsocket, R.I., headquarters of Walgreen
rival CVS Caremark (NYSE: CVS ). That's because CVS should absorb a huge chunk
of the millions of drug prescription customers Walgreen will lose when its
contract with pharmacy benefits manager, or PBM, Express Scripts expires on the
first day of 2012. In fact, CVS projects it should corral about 23 million
prescriptions that Walgreen has been selling through Express Scripts, according
to Bloomberg . Those additional prescriptions could boost CVS profit by as much
as 11 cents per share in 2012. CVS recently said it might earn $3.15 to $3.25 a
share in 2012, according to Bloomberg . Perhaps not wanting to jinx itself, the
CVS EPS forecast didn't factor in any of Walgreen's potential losses. Given
the prospect of a huge influx of new customers and a recent dividend increase,
Seeking Alpha called CVS an "Investor's Dream," projecting the company's
shares could hit $45 by summer. You have to wonder if they were referring to
summer in the southern hemisphere, considering CVS closed at $40.18 on
Wednesday, up more than 10% since Monday's final bell. Meanwhile, Walgreen
traded below $31 Wednesday morning before recovering to close at $33.37, down
only 13 cents. Investors might have overreacted to the possible loss of
customers resulting from the dustup with Express Scripts. They likely came to
their senses after recognizing Walgreen, based just outside Chicago, is the
biggest pharmacy chain in the country with 8,200 retail outlets. CVS has 7,300
drug stores, about 43% of which are within a mile of a Walgreen. Since the
dispute with Express Scripts erupted in June, Walgreen has been trying to get
most of its customers who have their drug coverage managed by Express Scripts to
switch to another PBM. The company admitted this has been a failure. (Walgreens)
negotiations with health plans and employers had resulted in retaining just 11.4
percent, or about 10 million, of the 90 million prescriptions managed by Express
Scripts that were filled by Walgreen in the fiscal year that ended Aug. 31,
according to The New York Times . While Walgreen prescriptions rose 5% to 819
million in 2011, the company expects a decline of 1% to 3% in 2012 volume. The
loss of Express Scripts customers is expected to have a negative impact of 21
cents a share in fiscal 2012, Walgreen told The New York Times . Analysts have
pegged the company's revenue loss at more than $4 billion. Walgreen hardly
seems to be panicking at the prospect of losing Express Scripts' customers.
But the company's blood pressure could spike considerably should Express
Scripts' proposed $29 billion acquisition of PBM Medco Health Solutions (NYSE:
MHS ) go through. The deal has sparked antitrust concerns, and perhaps after
seeing the government kill the proposed purchase of T-Mobile by AT&T (NYSE: T ),
Walgreen is confident the potential PBM combination will suffer the same fate.
As of this writing, Barry Cohen was long WAG.