Analyst: Walgreen split would cost Express Scripts on Astini News

On Thursday September 15, 2011, 6:10 pm EDT

NEW YORK (AP) -- Shares of Express Scripts Inc. fell Thursday after a Bernstein Research analyst said the pharmacy benefits manager could lose around 25 percent of its contracts if it stops doing business with Walgreen Co. when their current contract expires at the end of 2011.

THE SPARK: Bernstein Research analyst Helene Wolk said she still expects the companies to resolve their dispute, which became public in June. The standoff intensified this month.

However Wolk said Wall Street is underestimating the risks that Express Scripts faces if it does not come to terms with Walgreen. Losses would develop gradually because most pharmacy benefits management contracts last for three years, but they would not disappear even if Express Scripts completes its acquisition of competitor Medco Health Solutions Inc., she said.

THE BIG PICTURE: Express Scripts administers prescription drug plans, and it pays drugstores like Walgreen to fill prescriptions. After three months of contract renewal talks, Walgreen said in June that it would stop doing business with Express Scripts because it was being lowballed, and that Express Scripts sought too much control over other terms. This month, Walgreen said talks had stalled and launched a campaign to put pressure on Express Scripts.

The St. Louis company responded by filing a lawsuit against Walgreen, saying its campaign violates the terms of their contract and could hurt Express Scripts' business.

THE ANALYSIS: Based on a survey of large employers, Wolk said half would not want to participate in a network that does not include a large drugstore chain like Walgreen -- which is the biggest in the U.S. She estimated that in a worst case, Express Scripts could lose a quarter of its current contracts and about 31 percent of its annual profit.

"While contract negotiations are often contentious, particularly on pharmacy reimbursement levels, we believe contract termination would represent a mutually destructive scenario, thus increasing the likelihood of settlement," Wolk wrote.

Express Scripts expects a profit of $3.15 to $3.25 per share this year and analysts expect $3.17 per share, according to FactSet. Analysts currently expect the company to earn $3.86 per share in 2012. Express Scripts has said it believes there will be little effect on its business if it splits with Walgreen.

Separately, Deutsche Bank Securities analyst Ross Muken cut his price target on Express Scripts to $59 per share from $68 in response to difficult U.S. economic conditions.

Not all analysts agree. Stifel Nicolaus analyst Steven Halper said that Express Scripts does not face that much risk if it splits with Walgreen.

"Consultants I've talked to don't think Express is going to have trouble holding on to the vast majority of their contracts," he said in an interview. He believes that the companies will resolve their differences, however.

SHARE ACTION: Express Scripts shares lost $1.29, or 3 percent, to $41.50 in afternoon trading. The stock is down 24.3 percent since June 21, when its dispute with Walgreen became public. That comes in spite of a brief surge of as much as 9 percent after the Medco acquisition was announced.

Walgreen shares rose 65 cents to $37.30 Thursday, but the stock has fallen 17.4 percent since June 21.