With Express Scripts contract end looming, Walgreen plans to cut costs

Walgreen Co. plans to cut costs in preparation for the loss of its contract with pharmacy benefit manager Express Scripts, according to a securities filing.

If the companies do not renew the contract, which is set to expire Jan. 1, Walgreen's 7,800 pharmacies will no longer be included in the Express Scripts pharmacy provider network. Express Scripts clients include the Tricare and WellPoint plans.

Express Scripts prescriptions made up about $5.3 billion of Walgreen's sales in fiscal 2011.

Walgreen said it has initiated cost-saving plans to offset some of the estimated loss of up to 75% of business from Express Scripts clients through "reductions in selling, general and administrative expenses and cost of goods sold," primarily in the second half of fiscal 2012. The company will seek to retain business from Express Scripts' clients and expand its business with other payers and customers.

The Deerfield, Ill.-based drugstore chain said in June that contract renewal negotiations with Express Scripts had been unsuccessful in part because Express Scripts had proposed reimbursement rates below the industry average.

"This development is expected to adversely affect our net sales, net earnings and cash flows during the remaining portion of fiscal 2012 beginning Jan. 1, 2012, when we are no longer part of the Express Scripts pharmacy network," Walgreen said in the Dec. 29 filing.

Walgreen also said it may face "additional reimbursement pressure or potential loss of business" if Express Scripts' proposed merger with rival pharmacy benefit manager Medco Health Solutions is completed.