What is the Fallout from Walgreens' War?
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we head to the New Year, many Americans who have prescription drug benefits could be facing a difficult decision. Walgreens (NYSE: WAG) is locked in a bitter dispute with one of the largest pharmacy benefit management company, Express Scripts (NASDAQ: ESRX). This clash of the titans is an epic battle, and could have significant impacts to the average consumers.
Express Scripts is a leading PBM in the United States, and they continue to grow. Earlier this year ESRX announced plans to acquire Medco Health Solutions (UNKNOWN: MHS.DL) in a $29 billion dollar deal. This acquisition is expected to make ESRX the largest PBM in the country, double its size and fill nearly 1/3 of all prescription claims. This is huge volume and even dollars. With this pending acquisition, is Walgreens really stubborn enough to never fill an Express Script claim again? The answer is yes.
Earlier this year, Walgreens' CEO Greg Wasson was quoted saying, "We’re prepared and ready to live in a world without Express Scripts." This was back in July, almost 6 months before the end of 2011, and their relationship with ESRX. To this day, there has been little progress with negotiation process. The result of this stalemate? A public opinion war, with each side appealing to their customers.
If you are a current ESRX customer and have visited their website lately, you are likely to notice a nice little message with instructions on how to switch pharmacies. Express Scripts has been advising their customers to prepare for the impending divorce between the two giants. If you have been to a Walgreens, you may have noticed a large sticker on the front window that says "Stand with Walgreens." Walgreens is petitioning their customers and employer groups to consider switching their PBM from ESRX to another participating member. It is unclear who will win the PR battle, but Walgreens is likely to lose the war.
According to Express Scripts, fewer than 20% of their customers filled a prescription at Walgreens, while Walgreens reported that almost 11% of their claims were ESRX claims. ESRX may have the larger percentage, and intuitive thinking would suggest that they have more to lose. However, this is one case were the smaller percentage has a greater impact. While the 20% or so of ESRX's customers will have to find a new pharmacy, it won’t be an inconvenience for those customers. Express Scripts claims to have over 60,000 pharmacies in their network, and with the loss of Walgreens, that number goes to 54,000. Walgreens on the other hand has a lot more at stake, particularly the estimated $6 billion that ESRX brings to their door.
While we haven’t yet seen the impact of this dispute, come Jan 1, 2012, expect more than one ball to be dropped.
Andrew Dillard does not own shares of ESRX, WAG or MHS.