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  • dr_tjm42 dr_tjm42 Jul 22, 2012 9:56 PM Flag

    Did WAG cave-in to return to the ESRX network?

    The press release states that the
    companies will not be disclosing terms of the new contract, but we believe WAG
    ultimately accepted a lower rate than it initially wanted to return to the ESRX network.
    While ESRX had some incentive to settle as it may have been difficult to win new
    business without WAG, the lack of customer disruption and seemingly good customer
    retention at ESRX and MHS so far this selling season indicate that WAG lost at least
    some leverage in the dispute.

    Structural concerns remain. While this agreement removes a large near-term
    overhang, bigger picture structural issues remain. We continue to believe that the
    confluence of retail pharmacy commoditization (proven by ESRX), PBM consolidation,
    and payers’ (both private and governmental) desire to lower costs may eventually
    result in longer-lasting profit compression in retail pharmacy (especially post the
    generic wave). Walgreens’ acquisition of Alliance Boots also creates an overhang,
    given the high valuation, concerns over the logic of the deal, and large payment to be
    made in three years. While the current valuation looks attractive, the stock is not
    nearly as cheap pro forma for Alliance Boots.

    Credit Suisse

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    • That's your response?


      P.S. I would not short WAG but I would not buy it now either

      WAG is dead money and will trade in a range for a long time

    • I think Walgreens probably got a worse deal than if they had settled back in December.

      I am finding myself amazed at just how many of the posters on here assume that settling with ESI equals getting the customers back.

      This was about settling before losing the Medco customers which would have been even more disastrous for Walgreens. I think Walgreens knows that most of the ESI scripts are gone for good. There is really no catalyst that will allow them to recapture them. Had Walgreens cared about keeping those customers they would have settled before Jan 1 2012 because Walgreens is well aware that once lost they are mostly gone for good.

      I expect the share price to dive in October when this reality sets in.

      Disclosure: I have a very big position in RAD and a snall position in CVS.

      • 1 Reply to jimbo147
      • Walgreens moved on from esrx, and the dispute was at the point where esrx was beginning to lose contracts and is currently negotiating with Tricare to renew their contract and I guaranty that Tricare would not renew without esrx having a contract with wag. Walgreens has always been very involved with the military from immunizing troops to filling rxs for transitory soldiers. Wag did not cave, the first offer from esrx was negative reimbursement on the majority of rxs filled so it was common sense to not sign it. Wag had also just established a direct contract with logistics health to immunized Tricare customers to help get around some of the problems caused by esrx. This was announced 4 days before the contract resolution. This clearly means wag had fully moved on and esrx approached them with a new offer shortly thereafter. It's most likely a compromise occurred but its also very likely esrx caved as they were about to lose tricare along with other clients being swooped up by catalyst, optum rx, and cvs Caremark who are on better terms with wag.
        The Medco angle is way overblown as well as from the time esrx announced the merger to when it was approved Medco had lost some 45% of its client base, while it is still a good move by esrx it doesn't look nearly as good as it did originally
        As for getting its "customers back"wag will get 90% of them back because they are closer to patients than customers and until you get into your 40's you won't understand this. These patients didn't originally go to Walgreens because they were loyal to Walgreens but because there was a pharmacist there they were loyal to. 6 months at CVS isn't going to erase that loyalty.