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CVS Health Corporation Message Board

  • dr_tjm42 dr_tjm42 Jul 24, 2012 1:26 PM Flag

    Credit Suisse keeps $28 price target on WAG

    Company Ends ESRX Dispute, But EPS Benefit
    May Be Smaller Than Expected; Remain
    Cautious on the Stock

    CS View: Walgreens and ESRX announced this morning a multi-year
    agreement that will allow WAG to return to the ESRX network as of Sept. 15,
    2012. The deal ends a year long stand-off over the reimbursement rates
    that ESRX pays WAG. While the resolution removes significant uncertainty
    and makes WAG an investable name once again, we remain cautious on the
    stock. We believe WAG accepted a lower rate than it initially wanted and
    that the earnings benefit from the agreement may ultimately disappoint
    investors. Beyond this deal, we also continue to see the Alliance Boots
    acquisition as a negative overhang and remain concerned about potential
    longer-term structural headwinds beyond the generic wave (reimbursement
    rate pressure and growth of restrictive networks).

    EPS benefit estimated at only $0.05-0.10 in fiscal 2013, at best.
    Walgreens implied that the loss of ESRX scripts would pressure full year
    earnings by about $0.31-0.32 ($0.21 for eight months in fiscal 2012). While
    this represents the starting point in calculating the benefit from returning to
    the network, we note the following offsets: 1) It’s unlikely that WAG will win
    back all of this business. We estimate that the company will only regain 50-
    60% of ESRX scripts, as competitors like CVS will fight to retain the new
    business and some ESRX clients may not return to an open network.
    2) We believe WAG will earn less on a per script basis than under the old
    ESRX contract. Each $1/script concession reduces the upside by $0.05 hit.
    3) The new ESRX rate should also apply to the historically richer MHS book
    of business. Again, each $1/script concession reduces the upside by $0.05
    hit. 4) Walgreens will likely promote aggressively to win this business back.
    5) It is unclear how many MHS scripts were signed to a network that
    excludes WAG.

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