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Walgreen Profit Drops as Contract Dispute Drains Customers

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Dec. 21 (Bloomberg) -- Walgreen Co. fell after reporting first-quarter profit that trailed analysts’ estimates amid a dispute with employee-benefits manager Express Scripts Inc.

Net income fell 4.5 percent to $554 million, or 63 cents a share, in the quarter ended Nov. 30, from $580 million, or 62 cents, a year earlier, the Deerfield, Illinois-based company said today in a statement. Analysts projected 67 cents, the average of 23 estimates compiled by Bloomberg.

The standoff with Express Scripts, which prompted CVS Caremark Corp. and Rite Aid Corp. to try to lure customers, and a delay in the cold and flu season, hurt Walgreen’s profit. While Walgreen reiterated that it doesn’t plan to be part of the Express Scripts network beginning Jan. 1, the company said today it remains open to “any fair and competitive offer.”

“Patients could develop new buying habits as they are forced to move away from Walgreen to other retailers if no deal is reached,” Tom Gallucci, an analyst at Lazard Capital Markets in New York, wrote today in note to clients. “After working to move their prescriptions to a new store, all patients may not return to Walgreen even if they ultimately regain access to Walgreen,” said Gallucci, who rates the shares “neutral.”

Walgreen fell 0.4 percent to $33.37 at the close in New York. The shares have dropped 14 percent this year.

The contract with Express Scripts is valued at more than $5 billion in annual drug sales. The six-month dispute revolves around how much St. Louis-based Express Scripts would reimburse Walgreen.

Walgreen is “locked and loaded and ready to move on” after talks it initiated last week failed to end the dispute, Chief Executive Officer Greg Wasson told analysts today on a conference call.

Walgreen projected that in 2012 it may retain 62 million of the 88 million prescriptions it now fills for Express Scripts, Chief Financial Officer Wade Miquelon said on the call.

The retailer 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.

Flu Shots

“We would welcome Walgreen in our network, but only at rates and terms that are right for our clients,” Brian Henry, a spokesman for Express Scripts, said today by e-mail.

Walgreen said the decision to end the Express Scripts contract reduced per-share profit in the quarter by 2 cents, including 1 cent because of a reduction in same-store pharmacy sales. Walgreen gave 5 million flu shots in the quarter, down from 5.6 million a year earlier, reducing profit by 1 cent, according to the statement.

Revenue advanced 4.7 percent to $18.2 billion, matching the average of 19 estimates compiled by Bloomberg. Sales by stores open at least a year rose 2.4 percent.

CVS, based in Woonsocket, Rhode Island, said yesterday the end of Walgreen’s agreement to provide drugs for Express Scripts customers may give it as many as 23 million prescription sales and boost profit as much as 11 cents a share next year.

The impasse “could present a very significant opportunity for us,” CVS Chief Financial Officer Dave Denton told analysts in New York. “We think many customers are more likely to move to another major chain.”

About 43 percent of CVS stores are within one mile of a Walgreen drugstore and 85 percent are within five miles, CVS said.

With a third of its stores within a mile of Walgreen’s locations, Camp Hill, Pennsylvania-based Rite Aid “is certainly going to do our best” to grab Walgreen customers, Chief Executive Officer John Standley told analysts last week. He declined to discuss advertising and other efforts.

(The company held a conference call for analysts at 8:30 a.m. New York time. Click {WAG US <Equity> EVT <GO>} to listen.)

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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