The Nightmare is Over for This Pharma Giant

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Walgreen (NYSE: WAG) the biggest pharmacy chain in the US, and Express Scripts (NASDAQ: ESRX), the country's largest pharmacy benefits manager are in the news since last year when the battle between the two began over payment issues. As a result, both parties headed towards Spiltsville, leaving millions of Americans with Express Scripts to look for a new pharmacy chain. The dispute damaged investor's confidence for Walgreen along with Express Scripts customers. As a result, Walgreen’s stock experienced a lot of volatility during that period with a decrease of ~25%. However, Walgreen has gained its momentum after the two companies patched things up in July and since then the stock has shown an upside movement of ~20%. Walgreen has settled all its disputes with Express Scripts and renewed its agreement, allowing Express customers to return to Walgreen Pharmacies again. The renewal is expected to bring back several billion dollars of revenue to Walgreen.

On the other hand, the dispute didn't have any major impact on Express Scripts business. The company was benefited with the ~$29 billion acquisition of its rival PBM (Pharmacy Benefit Manager) Medco Health Solutions. After the acquisition, both companies control ~40% of the drug market and together are in a dominant position to lead the same. Express Scripts expects cost savings of ~$1 billion via this acquisition after Medco is fully integrated with it. This move by the company will turn out to be a favorable one with increased earnings over the next five years. Along with this, the growing demand of Generic drugs would be a huge opportunity for the company in the long run.

Throughout the heated dispute between Walgreen and Express Scripts, one company which gained the most out of it was the Walgreen’s rival pharmacy chain CVS Caremark (NYSE: CVS). The company took advantage of the dispute and focused heavily on advertising, as a result various Express Scripts customers shifted to CVS from Walgreen. Because of the increased business, the company was also able to increase its market share to 60% from earlier 50%. Its revenue also increased by ~13% to ~$30 billion y/y in 3Q12. To retain its profitability, CVS is coming up with various innovative techniques. Most recently it introduced new features in its mobile suite such as the CVS mobile app and a website especially for mobiles to enhance the customer experience of managing health benefits on mobile.

Moving back to Walgreen, let's see what growth factors the company has in its bucket to overcome its losses from the dispute in the long run.

Acquisition Synergy

To expand its presence worldwide, Walgreen announced its acquisition of 45% stake in the European pharmacy retailer Alliance Boots for ~$6.7 billion. The company sealed the first phase of the transaction with 45% stake and would gain a full control in Alliance Boots by 2015. Walgreen expects to increase its footprint in Europe and also in several emerging markets via this acquisition. The combined synergy of both the companies is expected to be ~$100-150 million and they have already started setting up joint-ventures to achieve the synergy. The combined entity will be one of the world’s largest pharmacy retailers with over 11000 stores in 12 countries. This acquisition will open many profitable avenues for Walgreen.

Walgreen as Preferred Pharmacy

Walgreen was chosen as a preferred pharmacy chain for 2013 Medicare Part D from three leading industry giants and a new player. These include Coventry Health Care, United Health Care, Humana, and SmartD Rx. Earlier Walgreen was associated only with one plan under Coventry, which is now increased to three of the United Healthcare's plans, two plans from Coventry, Humana's second largest plan and two start up plans from SmartD Rx. These newly opened opportunities would be an important tailwind for the company in 2013 with an expected increase of ~$0.15 in its EPS. Also, Walgreen will be the only preferred pharmacy chain in these network plans and ~40% of the business in these health plans is to be generated at Walgreen. I expect this Medicare Part D positioning to enhance Walgreen's market share and also offset its recovery phase from the Express Scripts business.

Along with these aspects, the company is continuously making efforts to win back its customers’ confidence after the dispute. The company is investing heavily in advertisement to attract the customers. It also started a promotional campaign to offer $25 Walgreen gift card to the customers for switching back to Walgreen. I expect ~50% recovery of lost customers to happen by 2013. Looking at these factors, I think Walgreen has a solid growth trajectory for the future domestically as well as internationally and I believe this would be a good entry point for this stock.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own

blog comments powered by Disqus