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The long-standing impasse between Walgreen Co. (WAG - Analyst Report) and Express Scripts Inc. (ESRX - Analyst Report) came to an end on a positive note with both the companies announcing a multi-year pharmacy network agreement. Following the culmination of this seven-month old dispute, the investors heaved a sigh of relief as the shares of Walgreen shot up 12% to $34.2 while a 2% increase was witnessed for Express Scripts shares to $58.76, at the close of trading yesterday.

Financial terms of the multi-year agreement have not been disclosed. However, per the settlement, September 15, 2012 onward the pharmacy network of Walgreen will start filling prescriptions from Express Scripts customers. With the addition of the retail giant to its network, Express Scripts will extend its services to over 64,000 pharmacies across the US.

The Walgreen-Express Script clash came to the fore in December last year and consequently, Walgreen terminated its contract with Express Scripts from January 1, 2012. Ever since, the 7,700 pharmacies of Walgreen were no longer a part of Express Scripts’ pharmacy provider network that adversely affected the company’s performance.

Walgreen’s client list got considerably reduced as major clients like Tricare and WellPoint moved away. Even, during the last reported quarter, this impasse had a negative impact of 6 cents per share on Walgreen’s bottom line.

This was not the end of the woes for Walgreen. The mega-merger between Express Scripts and Medco Health Solutions in April this year, further intensified the competitive landscape in the PBM industry and put Walgreen in a tight spot.

However, the scenario is expected to improve radically with the latest deal between these two stalwarts. Following the recent agreement, we believe that Walgreen is poised to compensate for the losses incurred since the termination of the previous deal.

Meanwhile, rival PBM companies like CVS Caremark (CVS - Analyst Report) and Rite Aid (RAD - Analyst Report) were distressed following the resolution of the dispute between Walgreen and Express Scripts. Their share prices moved downward by more than 6% as they benefited from the impasse.

During the first quarter of 2012, CVS Caremark delivered huge retail growth as it benefited significantly from the company’s record market share gain, following the termination of the Express Scripts and Walgreen contract. This led to a 350 to 400 basis points (bps) increase in CVS’ pharmacy same store sales, leading to roughly 5.7 million to 6.5 million of prescriptions filled.

Also with the benefit of additional prescriptions resulting from the Walgreens-Express Scripts dispute, Rite Aid’s number of prescriptions filled in same stores increased 3.0% in the first quarter of 2013.

CVS Caremark is optimistic about a benefit of 5 cents per share related to the additional business gained from the Walgreen-Express Scripts conflict in the third and fourth quarter of 2012 and also expects to retain at least 50% of the business gained from the same through the fourth quarter 2012. However, we prefer to remain on the sidelines until more visibility is obtained in this regard.

We are encouraged with the resolution of the Walgreen-Express Scripts impasse. The latest agreement between the two PBM giants indicates that both of them are mutually beneficial and we expect their association to continue in the future.   

Walgreen currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain a long-term Neutral recommendation on the stock, at par with Express Scripts, CVS Caremark and Rite Aid.

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