WAG fires another salvo in bid to outflank ESI

Another quality regional drug chain is about to be a memory.

Walgreens scored another expansion coup last week with its announcement that it will absorb Pine Bluff, Ark.-based USA Drug, ranked No. 31 in sales on the DSN PoweRx list of the nation’s top 50 pharmacy retailers. The deal, valued at $438 million, includes all of the storied holdings owned by founder and pharmacist Stephen LaFrance, including 144 stores in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee; corporate offices; the company’s big and highly automated distribution center in Pine Bluff; and the wholesale and private-label business owned by Stephen L. LaFrance Holdings and members of the LaFrance family.

For Walgreens, the deal is the latest in a series of strategic moves in the wake of a costly dispute with pharmacy benefit management giant Express Scripts over the pharmacy benefit manager’s contract reimbursement rate. Since the service contract between the two entities expired in January, effectively shifting prescription and front-end business away from the chain’s 7,980 drug stores, Walgreens has seen a significant reduction in both sales and earnings.

Its most recent financial results, for the third quarter of fiscal 2012, underscore the impact. For the three-month period ended May 31, net earnings for Walgreens dropped 10.8% from the same period last year, to $537 million, with sales down 3.4%. Prescription sales slid 6.6% on a company-wide basis and a sobering 9.9% in stores open more than a year. Absent Express Scripts’ fulfillment contract, Walgreens filled 192 million scripts in the three-month period, a decrease of 8.4% from the prior-year third quarter.

Nevertheless, it looks like Walgreens is rising to the challenge. For one thing, it’s clear that the retail pharmacy giant is holding firm in its refusal to participate in unprofitable PBM fulfillment contracts, even at a real cost to its top and bottom lines [a decision which has won the company praise from small-scale pharmacy operators without the clout to stand up to PBM take-it-or-leave it terms]. For another, the company has repeatedly signaled its determination to move on with or without ESI.

How? In part by bypassing the PBM route and going directly to employers and other health plan sponsors with a growing menu of easily accessible health and pharmacy services, and in part by building up its pharmacy network through purchases like USA Drug that company strategists hope will make Walgreens almost impossible for any PBM to ignore when putting together local provider networks.

Drug Store News' Michael Johnson does a fine job of analyzing the ramifications of the buyout for Walgreens as it works to regain its equilibrium and growth momentum without the millions of Express Scripts members no longer filling their prescriptions at the chain. But are there enough other successful regional pharmacy players out there as potential takeover candidates in other markets to make that strategy viable on a national level?

And will all of Walgreens’ moves be enough to overcome the loss of ESI’s millions of patients?

Only time will tell. What do you think?