Walgreen Co. is making its case for its decision to exit the Express Scripts Inc. pharmacy provider network starting next year.

Walgreens, Express Scripts, pharmacy provider network, 8-K filing, The Value of Walgreens, pharmacy benefit manager, PBM, prescription drug benefits, Express Scripts-Medco merger, Medco Health Solutions, pharmacy, drug chain, drug store, employer health plans, pharmacy chain, Russell Redman, prescription drugs, PBM market, PBM agreement, Walgreens Pharmacy Customers, Mark Miller, William Blair & Co., Helene Wolk, Sanford Bernstein & Co.

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Walgreens touts its value sans Express Scripts

September 7th, 2011

NEW YORK – Walgreen Co. is making its case for its decision to exit the Express Scripts Inc. pharmacy provider network starting next year.

In an 8-K filing Tuesday with the Securities and Exchange Commission, Walgreens explained the value that its nearly 7,800 drug stores offer health plans and employers and spelled out options that payers can take "to move forward with Walgreens" as of Jan. 1, when the pharmacy chain plans to end its participation in the Express Scripts network.

A stand-off between the drug chain and pharmacy benefit manager has continued since Walgreens announced in late June that it would leave Express Scripts' pharmacy network because of unsuccessful contract renewal talks.

And Walgreens appears prepared to do just that, despite reporting that the PBM processes an estimated 90 million prescriptions to be filled by the chain in fiscal 2011, accounting for about $5.3 billion in annual sales. Besides this week's 8-K filing, Walgreens has launched a letter-writing campaign to benefits consultants that outlines the reasons it likely won't be part of Express Scripts' network after Dec. 31.

"This year, Walgreens has worked hard to reach a contract renewal agreement with Express Scripts, the pharmacy benefits manager, to continue serving its clients and patients in 2012 and beyond. We have offered a number of cost-saving concessions which, in effect, would hold annual average prescription reimbursement cost increases to within an estimated 2% annually over the next three years. However, negotiations remain at an impasse, and Walgreens has begun informing patients that we will not be part of the Express Scripts network as of Jan. 1, 2012," Walgreens stated in a white paper titled "The Value of Walgreens" that was submitted in the 8-K filing.

In the paper, Walgreens touted the accessibility of its vast store base to consumers and employees, competitive pricing for prescription drugs and its array of health care services beyond filling prescriptions, including immunizations, health testing, coordinated wellness care, medication therapy management and work-site health centers — all of which, the chain explained, translate into improved health outcomes and lower medical costs.

"Excluding Walgreens from a pharmacy network will result in little to no savings for most sponsors and patients and, in some cases, will raise costs while causing significant patient disruption and risking gaps in care and increasing administrative costs on plan sponsors," Walgreens said in the paper.

The chain also noted that health plans and employers have alternatives to maintain access to Walgreens for drug benefit plan members.

"There are options," Walgreens stated in the white paper. "Walgreens can contract directly with plan sponsors or help plan sponsors establish a custom retail pharmacy network, if consistent with their current PBM agreements. Walgreens believes that our costs are in line with other retail pharmacies. In most cases, this would mean that Walgreens' average cost per adjusted script will be within 2% of the average cost per adjusted script of the non-Walgreens retail pharmacy network, on an apples-to-apples basis."

Interestingly, Walgreens' stance has firmed in the wake of the merger deal announced in late July by Express Scripts and Medco Health Solutions Inc. If approved by regulators, the transaction would create the nation's largest PBM — holding about a third of the market for prescription drug benefits — and give Express Scripts significantly more leverage in the dispute.

On its website home page, Express Scripts has posted a message titled "Walgreens Pharmacy Customers: Plan Now for Upcoming Network Change" and provided a link to a page that gives consumers more information and explains how they can move their Walgreens prescriptions.

"At Express Scripts, we're committed to keeping your prescription drugs affordable and accessible. That's why we negotiate cost-competitive agreements with all of our participating retail pharmacies. Unfortunately, Walgreens' proposed 2012 prices are much higher than the other pharmacies within our network," Express Scripts said on the web page. "If we accepted Walgreens' rate, their higher costs may affect your future premiums. As a result, Walgreens will no longer be a participating provider in our pharmacy networks effective Jan. 1, 2012."

The PBM then went on to say "it's easy to change pharmacies" and provided links to help consumers find other pharmacies or enroll in home delivery with the Express Scripts Pharmacy.

"You can move your Walgreens prescriptions to another pharmacy now and avoid having to change pharmacies at the end of the year. Simply ask your new pharmacy to call Walgreens or take your current prescription bottle to your new pharmacy," Express Scripts said on its website.

Following early August investor meetings with Walgreens chief financial officer Wade Miquelon, analyst Mark Miller of William Blair & Co. said in a research note that the drug chain has stiffened its position and chances are the dispute will carry over into 2012.

"We now believe Walgreens' dispute with Express Scripts may be more protracted than current [Wall] Street expectations. We now estimate there is a 50% chance this impasse continues into 2012; previously, we estimated 80% likelihood of settlement by year-end," Miller wrote. "Mr. Miquelon was definitive on the company's approach. 'This is not a negotiation,' he said. 'This is a stand.' "

What's more, "Walgreens best alternative to an agreement appears stronger than investors initially perceived," according to Miller.

"Management expects Express Scripts to account for $5.3 billion (about 7%) of Walgreens' fiscal 2011 sales. Of the 11% of sales related to Express Scripts' Medicare Part D, Walgreens intends to educate customers about their pharmacy options in the fall sign-up period, which may allow the company to retain a large portion of this business," he explained. "Of the 18% from the Department of Defense (DoD), Walgreens believes its current rates are competitive but has offered to reduce the DoD's rates further. We also understand there are clauses that may allow the DoD to put the contract out to bid. If this were to happen, Walgreens could regain the business if the DoD signed a new contract with another pharmacy benefit manager. Or Walgreens could sign a direct arrangement with the DoD."

Miller also noted in his analysis that managed care organizations (MCOs) represent 45% of the $5.3 billion in sales involving Express Scripts. "We understand some of the MCOs can force a network change or contract directly with Walgreens," he said. "Lastly, 26% of Walgreens' exposure to Express Scripts comes from commercial business that renews, on average, every three years."

When asked in late July what the Express Scripts-Medco merger means for the chain drug store sector, Sanford Bernstein & Co. analyst Helene Wolk said that the deal shifts the balance of power slightly to the PBMs.

"I think this increases the urgency for Walgreens come to terms with Express Scripts, given that it could be Express Scripts' and Medco's volume at risk," Wolk also commented at the time.