Walgreens confident in Q2 results following Express Scripts exit Jan. 1

DEERFIELD, Ill. — On the eve of a potential Federal Trade Commission approval of the Express Scripts-Medco merger, Walgreens' underlying fundamentals still are strong, Walgreens president and CEO Greg Wasson told analysts Tuesday morning. It's that underlying strength that has helped Walgreens in the wake of its exit from the Express Scripts pharmacy benefit network, a factor that impacted Walgreens' net earnings by 7 cents per diluted share for its second quarter ended Feb. 29.

The big question is what happens to that Medco business if the Exress Scripts-Medco merger is approved? "We have a good relationship with Medco and a long-term contract which we intend to honor," Wasson said. Walgreens expects that contract to stand, however Wasson reiterated that Walgreens is "steadfast in the belief that this decision [to not renew the ESI contract] is in the long-term interest of our employees … and shareholders." If the terms of its Medco contract did change, a change that Wasson characterized would be "extraordinary," Walgreens would stand firm on negotiating reimbursement rates that recognize Walgreens' value. Wasson added that there has been no indication that its terms with Medco would change if the ESI-Medco merger were approved.

Express Scripts represented 88 million prescriptions for Walgreens in 2011, compared with 125 million prescriptions associated with Medco members. Walgreens' Medco book is shrinking, however, to 108 million prescriptions at the top of 2012 and a projected 74 million prescriptions at the top of 2013, due to expected health plan migration out of the Medco pharmacy benefit manager offering.

Wasson is excited, however, about its negotiations with health plans going forward. "We've never been this busy this early in [the PBM selling season]," Wasson said. One of the points Walgreens has been making around its ability to drive health plan savings within a pharmacy network is 90-day fill at retail, which can generate between 7% and 9% in savings, according to the retailer. Walgreens 90-day fills are up 31%, Wasson reported. "This demonstrates that the true value of a 90-day [fill] at retail is becoming clear."

However, if not for a mild cold and flu season, Walgreens may have finished its second quarter with higher comparable net earnings despite its exit from the ESI pharmacy network. Net earnings for the second quarter were $683 million, a 7.7% decrease. Overall net earnings per diluted share were 78 cents, a 2.5% drop from the 80 cents per diluted share reported in the year-ago quarter. Walgreens reported that the mild cold and flu season negatively impacted the reported net earnings by 3 cents per diluted share.

This year's flu season represents the mildest start in 29 years, as characterized by the Centers for Disease Control and Prevention. Flu shots administered at pharmacies and clinics this flu season through Feb. 29 totaled 5.5 million, compared with 6.2 million a year ago.

Net earnings per diluted share for the first half of fiscal 2012 ended Feb. 29 were $1.41 per diluted share, a decrease of 0.8% from $1.42 per diluted share in the first half of fiscal 2011. This year’s results include the impact of 9 cents per diluted share from the effect of no longer being part of the Express Scripts network and the impact of 1 cent per diluted share in Drugstore.com operations and integration costs. Last year’s results include the impact of 1 cent per diluted share in restructuring and restructuring-related costs associated with Rewiring for Growth, and 1 cent per diluted share in Duane Reade integration costs. Net earnings for the first half of fiscal 2012 were $1.24 billion, down 6.3%.

Walgreens projects the annual impact of the ESI exit will be 21 cents per diluted share.

Second-quarter sales increased 0.8% from the prior-year quarter to $18.7 billion, while first-half of 2012 sales grew 2.7% to $36.8 billion. Prescription sales, which accounted for 61% of sales in the quarter, decreased 1.7%, while prescription sales in comparable stores decreased 3.9%. The company filled 196 million prescriptions in the quarter, a decrease of 4.2% over last year’s second quarter. Prescriptions filled in comparable stores decreased 4.9% in the quarter.

Walgreens acquired the prescription files and inventory from 100 chain and independent pharmacies in the quarter, including more than 30 Kmart pharmacies. Additionally, AARP selected Walgreens for a three-year contract to deliver retail drug store program benefits to AARP members. The relationship between Walgreens and AARP, which began in 2006, will provide AARP members with exclusive offers and rewards, and includes member and community outreach to promote health and wellness.

Meanwhile, front-end comparable store sales increased 2.1% in the second quarter, customer traffic in comparable stores increased 0.7% and basket size increased 1.4%, while total sales in comparable stores decreased 1.5%.

All second-quarter comparable store sales and prescription figures include 29 days in February 2012, Walgreens reported.