Citing a breakdown in contract renewal talks, Walgreen Co. plans to exit the pharmacy network of prescription benefit manager Express Scripts Inc. next year.

With the move, the chain's 7,700 drug stores won't participate in the Express Scripts retail pharmacy network starting Jan. 1. "While we have sought to negotiate a contract renewal agreement over the past several months, those talks have been unsuccessful," stated Walgreens CEO Greg Wasson.

DEERFIELD, Ill. — Walgreen Co. plans to exit the pharmacy network of prescription benefit manager Express Scripts Inc. next year because of unsuccessful contract renewal talks.

Walgreens said Tuesday that the breakdown in negotiations will lead the drug chain, which has about 7,700 stores, to not participate in the Express Scripts network starting Jan. 1, 2012. That includes more than 250 Duane Reade drug stores in metropolitan New York.

Plans call for Walgreens to continue filling prescriptions under Express Scripts plans through Dec. 31, 2011.

"While we have sought to negotiate a contract renewal agreement over the past several months, those talks have been unsuccessful," Walgreens president and chief executive officer Greg Wasson said in a statement. "Under the terms proposed by Express Scripts, it would not make good business sense for the strategic direction of our company to continue our relationship with them.

Wasson added, "Walgreens is committed to providing quality, convenient and cost-effective pharmacy services to our patients, but we cannot continue to deliver these services under the terms and rates Express Scripts offered. As the largest retail provider in their pharmacy network, we were surprised by Express Scripts’ ultimate stance during our talks, which made it clear to us that they no longer had an interest in continuing a meaningful relationship."

Express Scripts said Tuesday that it’s open to continued negotiations with Walgreens.

"In these challenging economic times, it is critical that we all work together to keep medicines affordable and accessible," Express Scripts chairman and CEO George Paz said in a statement. "It is shocking to us that Walgreens would back away from the table with six months to go in the current agreement, especially considering that negotiations are part of the normal course of business."

In explaining its decision, Walgreens stated that Express Scripts "insisted on being able to unilaterally define contract terms, including what does and does not constitute a brand and generic drug, which would have denied Walgreens the predictability necessary to reliably plan its business operations going forward."

The drug chain said Express Scripts also rejected Walgreens’ request to be informed in advance if Express Scripts intends to add or transfer a prescription drug plan to a different Express Scripts pharmacy network and to provide patients with equal access to Walgreens retail pharmacies.

In addition, Walgreens said Express Scripts "proposed to cut reimbursement rates to unacceptable levels below the industry average cost to provide each prescription."

Walgreens reported that Express Scripts processes about 90 million prescriptions that are expected to be filled by Walgreens in fiscal 2011, representing roughly $5.3 billion in annual sales.

"We believe the long-term ramifications of accepting Express Scripts’ proposal with below-market rates and minimal predictability for the services we provide would have been much worse than any short-term impact to our earnings," stated Wade Miquelon, Walgreens’ chief financial officer. "All parties involved in providing health care must work together to bring down costs. In a world where cost-effectiveness and access to health care is so important, any time an intermediary continues to disproportionately grow its profit per prescription at the expense of the provider delivering the service, the relationship is out of balance.”

Walgreens noted that Medicare Part D patients who use its pharmacies will continue to have the option during the open enrollment period near the end of the year to pick a Part D plan that includes Walgreens. In addition, some Express Scripts clients may be able to include Walgreens as part of their benefit offering, the chain said.

"We believe that the vast majority of patients, employers and payers will continue to value the quality, cost effectiveness and convenience of Walgreens pharmacy network, with the most accessible national coverage and trusted pharmacist relationships," added Miquelon. "With our understanding that a significant portion of all prescriptions processed by PBMs, managed care organizations and others are directly or indirectly up for renewal each year, we are optimistic about our ability to grow our business over time."

Walgreens’ retail pharmacy network serves more than 40 million customers each week, with pharmacies within three miles of nearly two-thirds of all Americans.

"As we continue to serve patients whose prescription drug benefit plans use Express Scripts through the rest of 2011, we regret any disruption they may face beginning in 2012," commented Kermit Crawford, Walgreens’ president of pharmacy, health and wellness. "We intend to do all we can to serve our patients and are committed to working with the many companies who value Walgreens services and are seeking to provide pharmacy, health and wellness solutions."

Meanwhile, Express Scripts said Walgreens’ current rates "are not competitive with its pharmacy peers." The PBM reported that over the next three years, the costs of nonspecialty branded medications are projected to rise about 10% per year (more than 30% over three years), the costs of branded specialty medications are slated to increase more than 14% per year (nearly 50% over three years), and more than $60 billion of branded medications will lose patent protection, opening the door to more affordable generic alternatives.

"Without Walgreens providing reasonable adjustments to its rates, our clients and patients will bear the financial burden of branded price inflation, while not receiving the full economic benefit of increased generic utilization," Express Scripts stated. "Under Walgreens’ current proposal, the added cost burden to our clients would result directly in profits to Walgreens."

Express Scripts also said it requested the same contract terms mutually agreed upon in the existing contract. "To be clear, Express Scripts has not asked to change the definitions of branded and generic medicines," the company stated.

The PBM added that control of pharmacy benefit plan design should remain with plan sponsors. "Walgreens wants to dictate which clients and members to serve, focusing on the most profitable patients," Express Scripts said. "Neither network providers nor Express Scripts should control pharmacy benefit plan design. This is the sole responsibility of plan sponsors to represent the best interests of their members."

According to Express Scripts, another pharmacy within its network is within a half-mile of a Walgreens pharmacy.

"Express Scripts is optimistic that Walgreens will return to the table and negotiate in good faith toward a common goal of providing optimal care at a reasonable and competitive rate for tens of millions of Americans," the company stated.

The 90 million prescriptions estimated to filled by Walgreens and processed by Express Scripts in the U.S. this year, about $5.3 billion in dollar volume, represents about 7% of Walgreens’ total revenue base and nearly 15% of Express Scripts’ expected retail claims volume in 2011, according to John Kreger, a PBM market analyst at William Blair & Co.

As a result, it’s in Walgreens’ and Express Scripts’ best interest to settle the matter quickly, Kreger said in a research note. "This tactic resembles the dispute between Walgreens and CVS in June of 2010, which was ultimately resolved in less than a month," he wrote.

"We believe both Express Scripts and Walgreens have strong incentives to find common ground and settle," Kreger added.

*Editor’s Note: Article updated with Express Scripts and analyst comments.