Leading drugstore chain Walgreen (WAG) recently entered into a three-year contract with a nonprofit organization AARP, to deliver retail drugstore program benefits to its members belonging to the 50-plus age group. Although both the organizations did not disclose the financial terms of the deal, but together announced that this new deal is aimed at further enhancing their long standing relationship that was initiated in 2006.
This new AARP program includes AARP membership card offers, AARP online discounts and Pharmacy benefits. Concurrently, both the companies together will also develop a new event called Walgreens Way to Well Health Tour in medically underserved areas plagued with chronic diseases. Under this event, they aim to provide medical coverage to approximately 100,000 people annually.
This strategic move by Walgreen should help make up for a part of the sales that will be lost due to the non-renewal of a big contract with Express Scripts (ESRX) that generated $5.3 billion annually. As a result of this non renewal, Walgreen had to forego its business with major clients like the Department of Defense Tricare plan and WellPoint (WLP).
However, Walgreen is presently working hard on winning new contracts. Earlier in December, Chinese Community Health Plan (CCHP), whose prescription drug insurance was managed by Express Scripts, transformed itself into a new pharmacy benefits management (PBM) company in order to obtain the service of Walgreen pharmacies. Walgreen also entered into a new deal with Express Scripts to provide services to Blue Cross and Blue Shield of Kansas City's prescription drug program (effective from January 2012). The company also estimates that its client retention rate in 2012 will be in the range of 97%–99% of the fiscal 2011 prescription volume, which is encouraging in our view.
In addition to this, the company recently came up with its comprehensive Patient Transition Plan, which will help smoothen the transition of existing members of the Express Scripts pharmacy network to another community pharmacy. Under this plan, Walgreens is providing several discounts to members of Walgreen Prescriptions Savings Club, which facilitates savings on over 8,000 brand names and all generic drugs.
We are optimistic about Walgreens' long-term prospects. The introduction of new generic drugs should help improve the company’s gross margin in the second half of fiscal 2012. Moreover, a strong cash balance enables the company to reward its shareholders.
Currently, Walgreen retains a Zacks #4 Rank (short-term Sell rating). However we have ‘Neutral’ recommendation on the stock over the long term.
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