Retail sales in January were generally mixed, and the leading drug chains’ fortunes — notably Walgreen Co. — varied widely.

retail sales, drug chains, January, Walgreens, Express Scripts, PBM, chain drug store sales, comparable-store results, same-store sales, Express Scripts network, comparable-store sales, prescription sales, prescriptions filled, Kermit Crawford, Greg Jacobson, pharmacy, prescription count, Deborah Weinswig, Citigroup Global Markets, benefit managers, reimbursement, CVS Caremark, Rite Aid

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Impact of impasse reflected in January sales

February 27th, 2012

NEW YORK – Retail sales in January were generally mixed, and the leading drug chains’ fortunes — notably Walgreen Co. — varied widely.

Overall, chain drug store sales improved a modest 2.3% to $18.17 billion during January, while same-store sales edged up just 0.5%.

The big news was Walgreens, which saw both its total sales and its comparable-store results fall as the impact of its dispute with pharmacy benefit manager Express Scripts Inc. struck home. January marked the first month that Walgreens has not been part of the Express Scripts network.

Walgreens’ overall sales for January dipped 2.3% to $5.8 billion, while comparable-store sales fell 4.6%, driven by a 7.9% decrease in comparable-store pharmacy sales that pulled chainwide prescription sales down by 6%.

Comparable-store pharmacy results received a 1.3% boost from calendar day shifts, but that positive factor was overwhelmed first of all by a 10.6% negative impact from the Express Scripts impasse, as well as a 2.1% hit from generic drug introductions over the past 12 months and a 2.4% negative effect from a weak cough, cold and flu season.

The number of prescriptions filled in comparable outlets slid 8.6%, reflecting, again, a negative impact of 10.6% from the loss of Express Scripts patients. In January 2011 prescriptions processed by Express Scripts made up 12.4% of Walgreens’ total script count.

“We expected that January would be a very challenging month on a comparable-prescription basis because of the impacts from not being part of the Express Scripts network as of January 1 and the much milder cough, cold and flu season we have been experiencing,” said Kermit Crawford, president of pharmacy, health and wellness services and solutions. “With January now behind us, we are moving forward with relationships with large and small employers, health systems, physician groups and other PBMs who value Walgreens’ ability to help lower overall health care costs. As we expect these relationships to grow, and as we move past the impact from this year’s weak flu season, we anticipate an improvement in the coming months in the number of comparable prescriptions filled relative to January’s result.”

Management also slightly revised its prior projection on prescription count for the full 2012 fiscal year. Executives now expect the number of scripts filled to come in at the low end of its previous range of 97% to 99% of the total of scripts filled in fiscal 2011. Besides the effect of the loss of Express Scripts patients, the revision takes into account such factors as a much weaker-than-expected flu season to date and general weakness in industry prescription trends.

The downward trend at the pharmacy counter more than offset a modest 1.6% gain in front-end comparable-store sales, which were influenced by a 0.6% dip in customer traffic and a 2.2% increase in the average transaction.

Responses on Wall Street to Walgreens’ January numbers varied considerably.

After conducting a second proprietary survey of leading benefits managers, Deborah Weinswig, analyst with Citigroup Global Markets Inc., is decidedly downbeat. Weinswig downgraded Walgreens’ stock to “sell” and lowered her fiscal 2012 earnings target to $2.54 per share from $2.67 while dropping her fiscal 2013 estimate to $2.60 from $2.93 per share.

In a research note Weinswig pointed out that 75% of benefit managers polled said they had not received “significant pushback” from employees since Walgreens left the Express Scripts network at the end of December. In addition, 66% of respondents said that the exclusion of Walgreens from the network would not meaningfully impact their employees.
Finally, Weinswig was surprised that 43% of benefit managers surveyed found that Walgreens’ reimbursement rates were higher than their current rates, while only 14% found them to be lower.

“We believe this could hamper Walgreens’ sell-through of its services, as employers are trying to cut costs and would not be willing to take on an additional expense to have Walgreens in the network,” Weinswig wrote.

In addition, the Citigroup survey found that only 14% of benefit managers polled were unwilling to consider a more restrictive network, and based on that Weinswig estimated that Walgreens will retain only about 15% of its Express Scripts prescriptions during fiscal 2012. That fact, wrote Weinswig, “gives us more confidence that CVS Caremark will be able to gain significant share as a result of the Walgreens-Express Scripts fallout. ... In addition, we believe that CVS’ retail business will be able to get more aggressive when it negotiates its reimbursement contract with Express Scripts, as it is currently the anchor of the Express Scripts retail network.”

As expected, Walgreens’ loss was others’ gain, with the main beneficiary probably CVS Caremark. While CVS Caremark does not issue monthly sales results, during the company’s recent fourth quarter conference call with analysts, executives pointed out that in January they saw greater-than-expected benefit from the Walgreens-Express Scripts dispute.

For its part, Rite Aid Corp. turned in positive results in January, with year-over-year improvement. Chainwide sales rose 1.6% to $1.92 billion, driven by a 2.2% increase in comparable-store sales. Despite a negative impact of 230 basis points from new generic introductions, pharmacy comparable-store results grew 2.1%, as script count rose 1.6% over January 2011. Front-end sales in comparable stores expanded 2.7%.