Walgreen cutting costs over Express Scripts fallout

Walgreen Co. began cutting costs in anticipation of losing as much as 75 percent of sales generated from employee-benefits manager Express Scripts Inc., the result of a six-month dispute over pharmacy reimbursement rates.

Reducing selling, general and administrative expenses may make up about half of the gross profit lost from Express Scripts, the Deerfield-based retailer said today in a regulatory filing. Most of the reductions, including cutting the costs of goods sold, will occur in the second half of the year.

Walgreen reiterated that it doesn’t expect to renew its contract with Express Scripts that expires Dec. 31. The contract, which manages prescriptions for employers and accounted for $5.3 billion of Walgreen revenue last year, centers on reimbursement rates for 88 million prescriptions, or 10 percent of the drugstore chain’s pharmacy business.

Walgreen rose 0.3 percent to $33.38 at 10:57 a.m. in New York. Before today, the shares had tumbled 23 percent since June 21, when the company said negotiations with Express Scripts were unsuccessful. Express Scripts, based in St. Louis, gained 0.9 percent to $44.25.

Express Scripts is awaiting regulatory approval for its proposed $29.1 billion acquisition of prescription-drug benefit manager Medco Health Solutions Inc. If the deal is completed, Walgreen may face “potential loss of business,” according to today’s filing.

The revenue generated from Express Scripts represented about 7.3 percent of Walgreen’s $72.2 billion in sales in fiscal 2011. The retailer projected that in fiscal 2012 it may retain 62 million of the 88 million prescriptions it now fills for Express Scripts, Chief Financial Officer Wade Miquelon said on a conference call with analysts Dec. 21.

Walgreen estimated it will fill about 29.5 million Express Scripts prescriptions from Sept. 1 through Dec. 31. Those orders will help Walgreen achieve 97 percent to 99 percent of last year’s prescription volume in the fiscal year through August 2012, Miquelon said.