Walgreen fiscal 2Q profit slides nearly 8 percent

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By TOM MURPHY, Associated Press

Walgreen Co.'s fiscal second-quarter earnings fell almost 8 percent, knocked down largely by its exit from the Express Scripts pharmacy network, but the drugstore operator still topped analyst expectations, and its shares outperformed broader market indexes Tuesday.

The nation's largest drugstore chain said its split with Express Scripts, a St. Louis-based pharmacy benefits manager, hurt results by about 7 cents per share in the quarter that ended Feb. 29. A mild cold and flu season also affected earnings by about 3 cents per share.

Express Scripts paid Walgreen to fill prescriptions, but the companies let a contract between them expire at the end of last year after months of talks failed to produce a new deal. Pharmacy benefits managers, or PBMs, run prescription drug plans and use large purchasing power to negotiate lower drug prices.

Walgreen processed about 90 million prescriptions for Express Scripts in fiscal 2011, and the drugstore operator retained about 15 percent of that total in its second quarter. Company officials said Tuesday they expect that percentage to rise, as clients like the state of Nebraska switch to health insurance providers that have Walgreen in its network.

Investors were wary about the impact this breakup would have on Walgreen earnings, said Morningstar analyst Matthew Coffina, who added that the drugstore operator turned in "decent results."

"I think more than anything it alleviates some concerns that could have been out there about just how drastic the operating margin contraction could be when those sales came off," he said.

Walgreen's net income dropped to $683 million, or 78 cents per share, in the three months that ended Feb. 29. That compares to $739 million, or 80 cents per share, a year ago.

Revenue climbed less than 1 percent to $18.65 billion from $18.5 billion a year earlier.

Analysts surveyed by FactSet expected, on average, earnings of 77 cents per share on $18.57 billion in revenue.

Walgreen also said Tuesday flu shots administered this flu season through Feb. 29 totaled 5.5 million, an 11 percent drop compared to last year.

Walgreen has said the split with Express Scripts would affect its performance during the current fiscal year, and it told analysts Tuesday it expects the breakup to hurt earnings by about 21 cents per share this year.

Even so, Walgreen CEO Greg Wasson told analysts that the company remains "steadfast in our belief that this decision was in the long-term interest of our customers and employees and shareholders."

Walgreen has said it would rather give up the revenue it got from Express Scripts than continue filling unprofitable prescriptions. Express Scripts has said it ended the Walgreen contract because the drugstore chain wanted a premium compared to what Express Scripts paid other pharmacies.

The drugstore chain's business could take another hit if Express Scripts completes its acquisition of another pharmacy benefits manager, Medco Health Solutions Inc. That $29.1 billion deal is being reviewed by the Federal Trade Commission.

Wasson said Walgreen has a good relationship with Medco, and it intends to honor the contract between the companies. The company declined to reveal the contract's length.

Walgreen, based in Deerfield, Ill., operated 7,841 drugstores at the end of February, or 151 more than it operated a year ago. It has more locations than competitors CVS Caremark Corp. or Rite Aid Corp.

Shares of Walgreen climbed 43 cents to close at $34.80 Tuesday, while the Dow Jones industrial average and the Standard & Poor's 500 index fell.

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