WAG-DEA Settlement to Hurt 3Q Earnings

Zacks

Recently announced, largest pharmacy chain in the U.S. Walgreens (WAG) forged an agreement with the United States Drug Enforcement Administration (:DEA) and Department of Justice to resolve all unsettled litigation. The agreement settles administrative and civil issues regarding the distribution and dispensation of controlled substances following DEA’s assessment of the company’s operations.

As per the agreement, Walgreens will pay $25 million for the third quarter ended May 31, 2013. Including this amount, the company will pay $80 million in total. Walgreens envisages the total impact of the agreement and other related costs to be 4 cents to 6 cents per share in the third quarter of fiscal 2013. This will act as a drag on third-quarter earnings.  
    
As reported earlier, Walgreens’ third-quarter sales of $18.34 billion missed the Zacks Consensus Estimate of $18.54 billion despite growth of 3.3% year-over-year. This marks the fifth consecutive sales miss for the company.

With sales missing the expectation and the recent news on settlement weighing on the bottom line, we wait to see whether Walgreens will beat the Zacks Consensus Estimate of 90 cents for the quarter. The company is slated to report third quarter results later this month.

Last year, in April, DEA inspected and issued an Order to Show Cause (:OSC) to 6 Walgreens retail pharmacies in Fla. and extracted certain controlled substance prescription records and other documents. This was followed by an OSC and Immediate Suspension Order (:ISO) on the company’s distribution facility in Jupiter, Fla.

According to the settlement with the DEA, Walgreens will surrender its DEA registrations at 6 of its pharmacies in Fla. until May 2014 and Jupiter distribution center until Sep 2014. Presently, the company owns over 800 pharmacies in the state.

Under the agreement, Walgreens will continue to battle prescription drug abuse. The company also picked out certain compliance measures. This underlines Walgreens’ focus to combat prescription drug abuse in the U.S.

Given the impact of the agreement on the third-quarter earnings, the settlement seems like another dilemma for the company. Currently, Walgreens carries a Zacks Rank #3 (Hold).

On the other hand, other stocks such as GNC Holdings Inc. (GNC), Rite Aid Corporation (RAD) and Herbalife Ltd. (HLF) are worth considering. These stocks hold a Zacks Rank #2 (Buy).

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