Strange are the ways of Big Corporations and Wall Street. The ones who get squeezed are you and I as retail consumers! We are nothing but numbers for corporate bean counters and we are at the mercy of companies like Express Scripts that resort to back door machinations and shenanigans in an effort to fool main street and perhaps Wall Street as well. It appears that Express Scripts just resorted to some of the worst underhand and unscrupulous dealings with Walgreen under their new agreement. Walgreen is either blissfully unaware of what hit them or worse still, perhaps knowingly agreed to new onerous terms and conditions and neglected to inform the rest of us! What do I mean? Read on..
Recently, with much fanfare and trumpet, the newly inked agreement between Express Scripts(NASDAQ: ESRX) and Walgreen (NYSE: WAG) went into effect on September 15 (SEE LINK). Fiercely loyal customers of Walgreen (including yours truly), rejoiced at the restored opportunity to return back to Walgreen and renew relationships and friendships with their superb Pharmacy staff. I personally have been a loyal customer of Walgreen for over a decade and regretted NOT a moment of it. When the announcement came that Express Scripts and Walgreen had come to a new agreement, I was elated and so was Wall Street. In fact,Goldman Sachs added Walgreen to their conviction buy list (SEE LINK). Unfortunately, that optimism was based on their perception that the agreement between Walgreen and Express Scripts was rooted in full disclosure and honesty and as it turns out, such was not the case.
Wall Street is upbeat about the prospects of Walgreen and considers the pharmacy chain to be a growth story again (SEE LINK). Unfortunately, it is not quite that simple. Why? Because, under the new agreement, Express Scripts now has the ability to offer Plan Sponsors (the ones who pay the bills), the opportunity to select a cheaper drug benefit plan that DOES NOT INCLUDE Walgreen! Guess what happens when a plan sponsor gets offered such a choice? Of course, they would go out and select the cheaper distribution network that does not include Walgreen. Who gets mostly ripped off in the process? Walgreen and its investors because this part of the agreement was never disclosed to the general public or Wall Street. Perhaps, Wall Street will get wind of this fact eventually, but in the meantime, investors are blissfully unaware!
Here is the note from Express Scripts to me -
Here is the note from Express Scripts to me -
Important pharmacy network update
You may have heard that Express Scripts reached an agreement to bring Walgreen back into our back into our broadest network of retail pharmacies. However, to help manage the cost of your prescription-drug benefit, your plan sponsor selected a retail pharmacy network that does not include Walgreen.
What does this mean for a retail investor? You now have to decide whether the new contract between Express Scripts is a net plus for Walgreen or whether the damage has already been done. Will Walgreen ever regain those customers who are already lost to Rite Aid, CVS Pharmacy and other competitors? I think there is little hope for recovery because common sense tells us that Express Scripts is probably offering this network choice to all of its plan sponsor customers. Why would any plan sponsor in their right mind refuse such an offer? What incentive do they have to offer Walgreen as a choice to their plan members? It is not like Walgreen is the only choice in many neighborhoods. When Express Scripts announced the rift between them and Walgreen they touted the fact that there were several alternative pharmacy options within a small perimeter of any Walgreen location!
Walgreen picked a fight that they could not win and should have known that. A pharmacy store is a commodity like many other retail stores. If you can get one item at a store, you can probably find it in any other store except for specialty items. Have you ever been turned away from a pharmacy because they do not carry your particular medication? In the worst case scenario, the particular store might not have your medication in stock but in most cases are able to order it for you the very next day. The same medical distributor that distributes to your favorite neighborhood pharmacy likely supplies all pharmacies in the immediate vicinity and in some cases entire towns and cities. Pharmacy distribution is like any other. Your Mom and Pop pharmacy has the same access as a national drugstore chain like Walgreen or CVS. The only difference is that if you need choices between locations (for example if you are traveling and forgot your medication), you have options.
What does this mean for a retail investor? You now have to decide whether the new contract between Express Scripts is a net plus for Walgreen or whether the damage has already been done. Will Walgreen ever regain those customers who are already lost to Rite Aid, CVS Pharmacy and other competitors? I think there is little hope for recovery because common sense tells us that Express Scripts is probably offering this network choice to all of its plan sponsor customers. Why would any plan sponsor in their right mind refuse such an offer? What incentive do they have to offer Walgreen as a choice to their plan members? It is not like Walgreen is the only choice in many neighborhoods. When Express Scripts announced the rift between them and Walgreen they touted the fact that there were several alternative pharmacy options within a small perimeter of any Walgreen location!
Walgreen picked a fight that they could not win and should have known that. A pharmacy store is a commodity like many other retail stores. If you can get one item at a store, you can probably find it in any other store except for specialty items. Have you ever been turned away from a pharmacy because they do not carry your particular medication? In the worst case scenario, the particular store might not have your medication in stock but in most cases are able to order it for you the very next day. The same medical distributor that distributes to your favorite neighborhood pharmacy likely supplies all pharmacies in the immediate vicinity and in some cases entire towns and cities. Pharmacy distribution is like any other. Your Mom and Pop pharmacy has the same access as a national drugstore chain like Walgreen or CVS. The only difference is that if you need choices between locations (for example if you are traveling and forgot your medication), you have options.
There have been quite a few occasions where I have traveled to my destination and found that I had forgotten a particular medication. It used to be very easy for me to call the local Walgreen pharmacy and ask them to pull up my records and transfer the refill from my home town pharmacy and the entire process would usually take an hour or two at the most. However, this was likely a short lived advantage for Walgreen. Other pharmacies, such as CVS, with a nationwide presence also now offer the same benefit. In short, Walgreen does not appear to have a competitive advantage.
Unfortunately for me as a patient and customer, I had little choice but to go back to the pharmacy that I had transferred my prescription to after the rift last year. I was disappointed as a consumer, but as an investor, I now see an opportunity. Retail investors are in a position to place bets ahead of money managers on Wall Street who likely have not caught wind of this loophole in the agreement and its ramifications. The situation could evolve once the market catches wind of this rather lopsided agreement, but given the fact that it took almost a year for the two to reach a new agreement, the possibility of an early revision to the current agreement seems unlikely. I rate Walgreen as a short or sell and Express Scripts as a buy or hold.
Unfortunately for me as a patient and customer, I had little choice but to go back to the pharmacy that I had transferred my prescription to after the rift last year. I was disappointed as a consumer, but as an investor, I now see an opportunity. Retail investors are in a position to place bets ahead of money managers on Wall Street who likely have not caught wind of this loophole in the agreement and its ramifications. The situation could evolve once the market catches wind of this rather lopsided agreement, but given the fact that it took almost a year for the two to reach a new agreement, the possibility of an early revision to the current agreement seems unlikely. I rate Walgreen as a short or sell and Express Scripts as a buy or hold.
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