Walgreens Holds The Cards In Dispute With Express Scripts

Walgreen's same store sales came in better than expected for August and I expect the quarter is now in the bag and then some. There is an overhang on Walgreens stock because Walgreens has not renewed their contract with Express Scripts. I believe their dispute with Express Scripts will be settled in time and there will be a nice pop in the stock when it happens.

I believe the Wall Street analysts have this wrong because of their short term orientation.  In the short run the lack of an greement would hit Walgreens sales and earnings as they would lose the Express Scripts customers. Express Scripts has longer term contracts so the initial effect on their earnings would be small.

In the longer run this would destroy Express Scripts, as few would sign new contracts with Express Scripts if their customers cannot go to Walgreens. There is little differentiation between pharmacy benefit managers (PBM). A consumer does not care who their health insurance uses as PBM but they do care  if they can fill their prescriptions at Walgreens. Do you know or care who your PBM is? Do you know the name of the pharmacy you use? Which would it hurt you more to lose?

Walgreens management has been the best in the business and I trust that they are simply using this advantage. In typical Wall Street fashion analysts are simply looking at the short term earnings effect this would have and ignoring that this negotiation is happening out of a position of strength for Walgreens. I remain long Walgreens.

3 comments:

PooOnShu said...

Many thanks to Walgreens for telling their customers to come to HR to voice their opinion. We were just blindsided with this information and have no idea how to direct them at this point, but our on-site pharmacy is Walgreens, and this particular store ONLY accepts insurance provided by our company. In essence, they would lose all of their pharmacy customers. So, the company will either have to get Anthem BCBS to hook us with another PBM, or they'll have to get a new pharmacy. I am really curious to know which is more likely to happen...

PooOnShu said...

To clarify my position: I work for the HR benefits department (bottom-rung employee) of the company I'm speaking about. It's possible that some of the HR higher-ups were aware of the situation but were waiting it out before coming up with a game plan, and weren't expecting the notice to go out just yet. Just speculation, of course.

Tsachy Mishal said...

I believe the dispute will be resolved well before the contract expires. But as part of the negotiation they both have to act as if they are willing to walk away and prepare for the possibility even if it is remote.
Walgreens is setting it up so that employers can deal directly with Walgreens but I'm not sure how that is supposed to work. I'm looking at this as an investor in Walgreens stock and am not familiar with the operational side.