Q4 Preview: Walgreen (WAG) Investors Looking for Express Scripts, Generic Drug Updates

Walgreen Co. (NYSE: WAG) shares are trading slightly stronger Monday heading into it's fourth-quarter earnings report.

Before the market opens Tuesday, Walgreen is expected to report earnings of 55 cents per share, with $17.94 billion in revenue previously disclosed. Earnings would be a 15 percent sequential drop, and 3.8 percent increase from the same period last year.

Walgreen shares fell 18.8 percent through the quarter and is off just over 9 percent in 2011. Walgreen has traded in a range of $30.17 to $47.11 over the last 52-week time frame.

Last quarter, Walgreen reported it could not reach an agreement with Express Scripts (Nasdaq: ESRX), and "Express Scripts" network would no longer include Walgreen's 7,700 pharmacies nationwide." As of August 31st, things weren't that much better, with Walgreen and Express Scripts "still very, very far apart" from reaching a resolution, according to Walgreen Pharmacy, Health, and Wellness President Kermit Crawford.

Also last quarter, Walgreen noted "customer traffic in comparable stores increased 1.7 percent for the third quarter, while basket size increased 2.2 percent." The data were not available in 2010's fourth-quarter report.

Data from Bloomberg has 16 analysts with a Buy rating, 9 at Hold, and 1 with a Sell. The Street's price target average is $45, with a low of $29 and high of $52.

Analyst Comments

• Goldman Sachs is modeling for earnings of 58 cents per share in the quarter. On Express Scripts, which Goldman says will be the main focus for investors, Walgreen is expected "to reiterate its forceful stance in its dispute with Express, as each party prepares to do business without the other." Goldman sees a resolution is the most likely outcome.
  
  Recent publication of the monthly Average Manufacturer Price data and the new Federal Upper Limits (FULs) from the Center for Medicare and Medicaid Services. Goldman commented that, "this forms the basis for Medicare reimbursement, but also adds transparency to the marketplace, which is unlikely to benefit drug stores, which can benefit from the opaque nature of generic drug pricing."
  
  Clarity in generics is also expected once generic Lipitor hits the market.
  
  
• Deutsche Bank notes "The upcoming generic wave is expected to drive profitability, with nearly $75 billion of drugs expected to go generic over the next 5 years. Additionally, an aging population and healthcare reform (could add 30MM new lives) are expected to drive utilization. However, we believe that reimbursement pressures (with a focus on costs) could mute generic profitability."
  
  On Express Scripts, Deutsche sees about "$700MM of EBIT to be at risk, creating significant uncertainty (with the increasingly hostile tone of the dispute suggesting a [near-term] resolution is unlikely)."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of their release. You can also check out Walgreen's past performace at Streetinsider's Walgren Income Statement.

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