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Earnings Preview: Walgreen reports earnings Tues

The Associated Press

Walgreen Co. has said its split with pharmacy benefits manger Express Scripts Inc. will hurt sales and earnings this fiscal year. Analysts will get an updated look at that Tuesday, when the largest U.S. drugstore chain reports on its fiscal second quarter.

WHAT TO WATCH FOR: Walgreen, based in Deerfield, Ill., and St. Louis-based Express Scripts let a contract between them expire at the end of last year after months of talks failed to produce a new deal.

Express Scripts had paid Walgreen to fill prescriptions. Pharmacy benefits managers, or PBMs, run prescription drug plans and use large purchasing power to negotiate lower drug prices. They make their money by reducing costs for health plan sponsors and members.

Walgreen said earlier this month prescriptions filled at stores open at least a year fell 9.5 percent in February. Prescriptions processed by Express Scripts made up more than 12 percent of its total prescriptions in February 2011.

Walgreen also said total sales for its fiscal second quarter, which ended Feb. 29, climbed less than 1 percent to $18.63 billion.

The drugstore chain has said it expects to keep around 97 percent of its fiscal 2011 prescription volume in the new fiscal year. The company's prescription volume could take an additional hit if Express Scripts completes the acquisition of another pharmacy benefits manager, Medco Health Solutions Inc. That $29.1 billion deal is being reviewed by the Federal Trade Commission.

Barclays analyst Meredith Adler said in a recent research note Walgreen's stock does not reflect the full impact of the Express Scripts dispute, especially if the Medco deal is approved. The analyst also believes Walgreen is not retaining as much Express Scripts business as it expected, and the drugstore chain will have a hard time cutting expenses to offset this.

WHY IT MATTERS: Walgreen operated 7,840 drugstores at the end of February, more than competitors CVS Caremark Corp. or Rite Aid Corp. Millions of people fill their prescriptions at Walgreen stores.

Walgreen competitors say they've gained some customers since the end of the Express Scripts contract. The split meant many Express Scripts customers had to find new drugstores to fill their prescriptions.

WHAT'S EXPECTED: Analysts surveyed by FactSet expect, on average, earnings of 78 cents per share on $18.58 billion in revenue.

LAST YEAR'S QUARTER: 2011 fiscal second-quarter earnings climbed 10 percent to $739 million, or 80 cents per share, as revenue rose 9 percent to $18.5 billion. Total sales and prescription sales at stores open more than a year each rose about 4 percent.

Walgreen's retail prescription market share rose to 20.1 percent, meaning the company filled one out of every five retail prescriptions for the first time in its history.