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Walgreens Reunites With Express Scripts, but CVS Claims Victory


April's Medco merger may have driven Walgreens back to the table.

MINYANVILLE ORIGINAL Shareholders in Walgreens (WAG) can breathe a sigh of relief after the American drugstore giant announced yesterday its reconciliation with Express Scripts (ESRX), the country's largest pharmacy benefits manager. CVS Caremark (CVS) is enjoying the lift following its largest rival's turbulence, and expects to continue seeing benefits through the end of 2012.

Walgreens and Express Scripts confirmed their split on January 1, while the new cooperate agreement will not take effect until September 15. That is more than three quarters of the year during which the Chicago-based pharmacy will forgo sales to tens of millions of Express Scripts customers. Add that on to several months of uncertainty in the months leading up to January's separation, and CVS has good reason to feel that it came out on top.

If the gravity of Walgreens' breakup and makeup with Express Scripts has not sunk in, it is only because its physical storefronts give the retailer better name recognition that its nebulous networking partner.

Walgreens and CVS both hold the title of largest drug retailer in the United States, depending on your preferred metric. Walgreens operates around 8,300 stores throughout the nation, and brought in $67.4 billion in total revenue last fiscal year. CVS's locations number in the mid-7,000s, though they managed to earn $96.4 billion in revenue for 2011. Together, the two pharmacies fill over one-third of all prescriptions annually.

Now let's compare those figures to Express Scripts. Pharmacy benefit managers, or PBMs, don't compete directly with brick-and-mortar stores. They serve their purpose as administrators, coordinating interactions between retailers, consumers, and insurance companies. A major characteristic of the PBM market is that it is more consolidated, and thus less competitive than the field of drug retailers with whom it negotiates. Walgreens and CVS may oversee 16,000 stores between the two of them, but they still have to vie against 40,000+ locations operated by Rite Aid (RAD), Kroger (KR), dozens of smaller regional chains, and the pharmacy divisions of Wal-Mart, Target, and Sears.

The vast majority of PBM customers, meanwhile, belong to one of two networks. Back in 2009, the three biggest PBMs were Express Scripts, Medco Health Solutions, and Caremark. These three firms administered the drug plans of over 200 million Americans with prescription drug coverage, which was an estimated 95% of the pharmaceutical insurance market. Caremark had already merged with the former Consumer Value Store in 2006 to create the modern CVS Caremark, locking out Walgreens from one member of the triumvirate. This April, four months after the departure of Walgreens, the FEC approved Express Scripts' acquisition of Medco for $29.1 billion.

Walgreens already stood to lose almost all of the 88 million prescriptions it filled for Express Scripts in 2011. With another 125 million from Medco now at risk, adding up to over a quarter of its total volume of 819 million prescriptions from last year, one can understand why Walgreens found itself ready to return to the bargaining table.
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