NEW YORK
(AP) — Walgreen Co. said that it is willing to walk away from more than $5
billion in annual revenue because pharmacy benefits manager Express Scripts
Inc. doesn’t pay it enough to fill prescriptions.

If the companies don’t settle their dispute, people whose
prescription benefits are handled by Express Scripts won’t be able to get their
prescriptions filled at the biggest drugstore chain in the U.S., and
Walgreen would give up about 7 percent of its annual revenue.

The announcement Tuesday follows a similar contract fight a
year ago between Walgreen and CVS Caremark Corp. that was resolved less than
two weeks after it became public.

The impasse with Express Scripts overshadowed news that
Walgreen’s net income climbed 30 percent in its third fiscal quarter.

Walgreen stock fell $1.90, or 4.2 percent, to $43.28.
Express Scripts finished up 20 cents to $54.99 after falling as much as 3.3
percent earlier in the day.

Walgreen, which has spent months negotiating a new contract
with Express Scripts, said it will stop participating in Express Scripts’
prescription plans starting Jan. 1.

Express Scripts is the second-largest pharmacy benefits
manager in the U.S.,
and it expects to handle at least 750 million prescription claims in 2011.
Walgreen said about 90 million of those prescriptions will be filled at its
stores.

Pharmacy benefits managers like Express Scripts pay Walgreen
to fill prescriptions. Walgreen said the St.
Louis company wanted to cut those payments so they
were less than the published cost of providing the prescriptions. Walgreen said
Express Scripts’ payments were already low, and it said the new rates would
have been “unacceptable.”

Express Scripts makes money by reducing costs for health
plan sponsors and members, so it tries to keep spending as low as possible.

Walgreen said Express Scripts also wanted to unilaterally
define contract terms including definitions of name-brand and generic drugs,
and transfer of prescription drug plans to different networks. It said those
terms would have made its business unpredictable. Walgreen said the combination
of low rates and unpredictable results would be worse than the loss of $5.3
billion in annual revenue.

Express Scripts said Walgreen’s rates are higher than other
pharmacies, and with drug costs increasing, those rates need to come down. It
said it has not asked for other changes to terms of the older contract, and has
not asked to change the definition of generic or name brand medications. It
accused Walgreen of wanting to pick and choose which plan members it will serve
so it can maximize its profits.

“It is shocking to us that Walgreens would back away
from the table with six months to go in the current agreement, especially
considering that negotiations are part of the normal course of business,”
said Express Scripts Chairman and CEO George Paz.

The company said it has been preparing for Walgreen’s
departure and that more than 50,000 other pharmacies participate in its
network. Walgreen had 7,715 locations as of May 31, and about 20 percent of all
U.S.
prescriptions are filled at a Walgreen store. The company has filled 617 million
prescriptions in the first three quarters of the fiscal year.

The struggle comes almost exactly a year after a similar
dispute between Walgreen and CVS Caremark that would have cost Walgreen about
$4.5 billion in annual revenue. Last June, Walgreen said it wanted to
transition out of CVS Caremark’s network by the start of 2011. Walgreen wanted
Caremark to pay it more for filling prescriptions, and it wanted Caremark to
drop policies encouraging members to fill prescriptions at CVS stores. CVS Caremark
responded by saying it would end the relationship in July, but the companies
agreed to a multiyear deal soon afterward. They did not disclose terms.

Jefferies and Co. analyst Arthur Henderson said he thinks
Walgreen and Express Scripts will soon reach a new agreement.

“The companies are simply too large not to do business
with each other so it seems likely to us that a deal will be reached within the
next several weeks so as to limit any disruption to mutual customers,” he
wrote.

Deerfield, Ill.-based Walgreen also reported that its net
income grew to $603 million, or 65 cents per share, during the three months
ended May 31. That’s up from $463 million, or 47 cents a share, a year ago when
its results were weighed down by costs associated with the health care reform
law, its acquisition of the Duane Reade chain, and restructuring costs.

Quarterly results included a penny per share in
restructuring costs. Analysts expected earnings of 62 cents per share on
average, according to FactSet.

Revenue climbed to $18.37 billion from $17.2 billion.