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.