Express Scripts Moves Past Split With Walgreen

TOM MURPHY | AP Business Writer

Express Scripts Inc. says it is doing fine after breaking up with pharmacy operator Walgreen Co., but it won't rule out getting back together with the largest U.S. drugstore chain.

Express Scripts, a pharmacy benefits manager based in St. Louis, paid Walgreen to fill prescriptions, but their contracted ended in December after the companies haggled unsuccessfully for months over terms for a new deal.

Deerfield, Ill.-based Walgreen had managed about 20 percent of Express Scripts' prescription volume before the contract ended. Express Scripts said Thursday it is keeping the vast majority of that business, and its clients are largely not upset with the split, which means many have to go to a new drugstore for prescriptions.

"At the end of the day ... Nexium is Nexium, Lipitor is Lipitor, drugs are drugs, and it shouldn't matter that much who's counting to 30," Express Scripts Chairman and CEO George Paz told analysts during a conference call with analysts.

Pharmacy benefits managers, or PBMs, run prescription drug plans and use large purchasing power to negotiate lower drug prices. They make their money by reducing costs for health plan sponsors and members. Express Scripts clients include employers, insurers, government agencies and unions.

Paz said they ended the Walgreen contract because the drugstore chain wanted a premium compared to what Express Scripts paid other pharmacies. He said that while community pharmacists play an important role in health care, they couldn't justify paying one a premium for services other pharmacies were doing just as well.

Walgreen said the pricing of different pharmacies within a PBM network varies by less than 5 percent, so no real significant savings comes from removing it. It also has said it would rather give up the revenue it gets from Express Scripts than continue filling unprofitable prescriptions.

Even though Paz said the move away from Walgreen has gone "without a hitch," the PBM remains open to more negotiations with the drugstore chain. But any deal has to be on terms that are best for his company.

Walgreen spokesman Michael Polzin said his company is focused on building its business without Express Scripts. "Since Express Scripts rejected our best offer in December, we have moved on," he said.

Paz spoke with analysts a day after the PBM said its fourth quarter earnings slid 12 percent, partially on costs tied to its proposed acquisition of competitor Medco Health Solutions Inc. Express Scripts earned $290.4 million, or 59 cents per share, in the three months that ended Dec. 31. Revenue increased 7 percent, to $12.1 billion.

Express Scripts announced in July a $29.1 billion deal to buy Medco, a combination that would create the country's largest PBM. Shareholders from both companies have approved the deal, which is being reviewed by the Federal Trade commission.

Regulators could make a decision as soon as March 12, Barclays analyst Lawrence C. Marsh said in a recent research note.

On Tuesday, Medco said it remains confident the acquisition will close in the first half of this year, and Paz said Thursday that the companies continue to make progress toward closing it.

Walgreen could lose more business if that acquisition goes through, noted Gabelli & Co. analyst Jeff Jonas. He said Express Scripts' transition from Walgreen has gone "extremely smoothly," and the PBM would have an advantage if contract negotiations resume.

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