Walgreens Bids Adieu to Express Scripts

Discussion
Jan 03, 2012
Tom Ryan

After a long negotiation battle, Walgreens Co. allowed its contract with Express Scripts Inc., the pharmacy-benefits manager (PBM), to end on News Years Day. Beyond the loss of billions in direct pharmacy sales, Walgreens stands to lose the pharmacy-related traffic generated by Express Scripts network customers.

Customers signed up with Express Scripts will have to go to a competitor to get their prescriptions filled or pay more at Walgreens. By Sunday, CVS, Rite Aid and Walmart were running commercials touting that they accept Express Scripts.

Walgreens issued a statement last Friday listing several steps it was taking to hold onto Express Scripts customers. They included:

  • A special discount in January for Express Scripts members on the annual membership fee for Walgreens’ Prescription Savings Club;
  • A boost in Walgreens’ pharmacist and consultant staff, including adding call center personnel;
  • Contacting high-volume patients;
  • Offering coupons for discounted health and wellness products and gift cards to some Express Scripts members.

"While we remain open to any fair and competitive offer from Express Scripts, we firmly believe that accepting their proposal was not in the best interests of our shareholders," said Walgreens chief executive Gregory D. Wasson in a statement.

Walgreens said its negotiations with health plans and employers had resulted in retaining 11.4 percent, or about 10 million, of the 88 million prescriptions managed by Express Scripts that were filled by Walgreens in the fiscal year that ended Aug. 31. Express Scripts’ prescriptions-based revenue in Walgreens’ fiscal year ended Aug. 31 represented about $5.3 billion of Walgreens’ annual revenue, which was $72.2 billion in fiscal 2011.

Walgreens has said it would rather give up the revenue it gets from Express Scripts than continue filling unprofitable prescriptions. The drugstore argued that it should be compensated for its new health-care services that help patients manage their medications and also reduces expenses for Express Scripts and its customers. But Express Scripts argued that Walgreens would become the most expensive pharmacy for basically doing the same thing that other pharmacies do.

Mr. Wasson said Walgreens continues to negotiate with employers and health plans and expects to eventually retain 25 percent of the customers who have Express Scripts plans.

"These results, and what we’re seeing in the marketplace, confirm our confidence as next year’s P.B.M. selling season begins," said Mr. Wasson in the statement. "We’re already working with many health plans and P.B.M.’s who value the role Walgreens and community pharmacies play in lowering overall health care and prescription costs."

Discussion Questions: What is your take on the decision by Walgreens to let its contract with Express Scripts expire? How big a competitive advantage falls to those stores accepting P.B.M. plans?

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10 Comments on "Walgreens Bids Adieu to Express Scripts"


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Dr. Stephen Needel
Guest
9 years 4 months ago

They lose nothing on the prescription side if indeed they were filling prescriptions unprofitably. I’d love to hear from an expert as to how much in collateral sales (other items shoppers buy when filling a prescription) they might be losing.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
9 years 4 months ago

This was a necessary and good move by Walgreens. At some point Walgreens was going to need to make a change and as they stated “earn a profit on prescriptions they sell and services they offer.” Better to do it now than wait another year or two when the pain would most likely be greater. Walgreens’ approach to building a Membership program to help customers save on prescriptions is a good one. This type of paid membership program, similar to Amazon prime builds customer loyalty. Walgreens should expect to see a larger basket and more visits per year per customer that pays for the membership.

With all of that said, competitors of Walgreens including Walmart, Target, Rite-Aid and CVS will need to pounce quickly since this window of opportunity to gain new script customers will shut quickly.

Gene Hoffman
Guest
Gene Hoffman
9 years 4 months ago

Walgreens decided to let its contract with Express Scripts expire, but never announced all of its reasons for giving up $5.3 billion in sales. Wow! That’s a lot of “unprofitable” business.

Walgreens’ decision may be right, but their reasons may be wrong … and possibly vice versa. The “true value” of what Walgreens did would seem to rest in future reportings.

Herb Sorensen
Guest
9 years 4 months ago

It’s not an area of special expertise for me, but I do see this as continuing warfare over efficiency, and who is going to reap the benefit of the efficiency. This would tend to give Walgreens the upper hand.

Ben Ball
Guest
9 years 4 months ago

Analyst reports suggest Walgreens will not retain nearly the percentage of Express Scripts-driven front end business (which is profitable) that they originally projected. This is going to hurt.

Competitors are already advertising the “welcome mat” to Express Scripts members. My holiday travels through the Southeast took me past billboards from at least three retailers I can remember doing just that.

This is no doubt a carefully calculated defensive move by Walgreens — in the classic spirit of “the best defense is a good offense” — and in the longer term that may play out well for them. But like Costco in the battle with Coke a few years back over pricing, I think there’s a very good chance we will see Walgreens blink first over the short-term pain this will inflict.

Gordon Arnold
Guest
9 years 4 months ago

Shareholders and investors are placing their capitol in stable markets and leading companies with the largest profits. This is compounded by the much smaller percent of unsecured investment dollars made available for stocks by the private investor. This said, a $5.3 billion reduction in unprofitable sales is a good trade for higher earnings per share which will bring interest from investors.

Kathy Ofsthun
Guest
Kathy Ofsthun
9 years 4 months ago

I am wondering why no one is talking about the consumer/patient here. Can they (eventually) benefit from this, or must it mean higher prices or less service for the same price?

Dave Wendland
Guest
9 years 4 months ago

When it comes to marketing and running successful retail operations, Walgreens is among the most savvy. Although one won’t know the true impact until patient counts are examined and the entire market basket analyzed, I think this was a move that had to be made.

Bob Lansdowne
Guest
Bob Lansdowne
9 years 3 months ago

Well, they shouldn’t be filling prescriptions unprofitably. But for the consumer, there are 2 issues (aside from health): Price, and convenience. If it’s more costly and less convenient (to take advantage of coupons and gift cards, etc.), despite an affinity for Walgreens, I’d be out of there. When all is said and done, RX drugs are merely a commodity available through a variety of sources.

Mike B
Guest
Mike B
9 years 3 months ago

I guess the part I find interesting is none of these other retailers are complaining so publicly that they cannot make a profit off of Express Scripts patients. What is the deal? I really wonder what Walgreens is thinking.

Also, their “prescription savings club” is basically a farce. You can obtain the prescriptions for similar cash prices through various other sources: the grocers or WMT with their $4 generics, warehouse club stores (which you do not need to hold a membership for to use the pharmacy at in most states).

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