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06-09-2012 18:45:00

Weak August Sales, Tricare Decision Weigh on Walgreen

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--Shares fall despite broader market rally as investors digest disappointing sales news and Tricare's network decision

--Tricare health plan won't let its beneficiaries who get drug coverage through Express Scripts resume getting prescriptions filled at Walgreen

--Walgreen had previously indicated Tricare represented about 15 million prescriptions in 2011

Shares of Walgreen Co. (WAG) are under pressure Thursday as the broader market rallies, with investors digesting news of weak sales in August and a decision by the U.S. Department of Defense's Tricare health plan to continue to exclude the pharmacy chain from its provider network.

Earlier Thursday, Walgreen said the company's same-store sales fell a bigger-than-expected 8.2% during August, as the pharmacy giant continued to suffer from generic-drug introductions and its dispute with Express Scripts Holding Co. (ESRX). Analysts surveyed by Thomson Reuters expected a decline of 7.3%.

Though August's same-store sales and total sales for the fiscal fourth quarter were disappointing, analysts and investors seemed to focus more on Tricare's announcement Wednesday evening, when it said it wouldn't let its nearly 10 million beneficiaries who get drug coverage through Express Scripts resume getting prescriptions filled at Walgreen outlets.

Walgreen had previously indicated Tricare represented about 15 million prescriptions in 2011, making up about 17% of the 88 million prescriptions filled at Walgreen pharmacies by Express Scripts members last year.

The decision is a setback for Walgreen as the drugstore chain tries to gain customers it lost starting Jan. 1, when it broke ties with Express Scripts. Walgreen and Express Scripts recently mended fences, but entities that hire Express Scripts to manage pharmacy benefits will have to specifically add Walgreen drugstores to their network before members can get prescriptions covered there.

Tricare's decision highlights the heightened interest among employers and health plans to opt for so-called "narrow networks," as clients look for savings by aiming to balance between drugstore options and prices for health-plan sponsors.

Though Walgreen has contended that clients aren't interested in narrow networks, J.P. Morgan analyst Lisa Gill in a research note said the current selling season for pharmacy-benefit managers showed more interest in the savings narrow networks can drive.

"We believe the Tricare decision is an incremental positive for CVS, as it should help lead to higher long-term prescription-retention rates," Ms. Gill said.

Shares of CVS Caremark Corp. (CVS) were up 1.9% to $46.40, better than the broader market's rally, while Walgreen's stock fell 2.5% to $34.98.

Jefferies analyst Brian Tanquilut said that while some Express Scripts clients, such as managed-care provider WellPoint Inc. (WLP), have adopted a broader pharmacy network that includes Walgreen beginning Sept. 15, Tricare's move bolsters Express Scripts's push for narrower networks. By restricting access to more-expensive retail pharmacies, Mr. Tanquilut said clients could reduce pharmacy costs while the company can generate better margins.

In August, Walgreen saw its sales fall 4.5% from the year-ago month to $5.85 billion.

Total comparable-store front-end sales decreased 0.6%, while prescriptions filled at comparable stores decreased 6.8% in August. Walgreen said the negative impact on comparable-store prescriptions filled due to not being part of the Express Scripts pharmacy network was 10.7 percentage points in August. Prescriptions processed by Express Scripts comprised about 13% of Walgreen prescriptions in August 2011.

Walgreen said the effect of generic-drug introductions in the last 12 months hurt total comparable sales by 5.1 percentage points. The industry's same-store sales have been hurt by rising demand for new generic drugs hitting the market, as they carry lower prices than branded products.

Total sales for the fiscal fourth quarter fell 4.9% to $17.08 billion, below analysts' expectations of $17.21 billion. Comparable-store sales for the fourth quarter decreased 8.7%, while front-end comparable-store sales for the quarter decreased 1.3%. Prescriptions filled at comparable stores decreased 8% in the fourth quarter, and comparable-pharmacy sales decreased 13%.

--Jon Kamp and Saabira Chaudhuri contributed to this article.

Write to John Kell at john.kell@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

September 06, 2012 12:45 ET (16:45 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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