Standard & Poor's revises Walgreen's outlook to negative from stable, citing potentially lower sales and earnings resulting from likely loss of Express Script, which accounted for 7% of company's revenue

Cindy Allen

NEW YORK , October 14, 2011 (Standard & Poor's) – Deerfield, Ill.-based Walgreen Co.'s contract renewal negotiations with Express Script have been unsuccessful to date and the loss of this contract could result in a meaningful revenue and profit decline in fiscal 2012.

We are revising the outlook on Walgreen Co. to negative from stable based on the potential for lower earnings in fiscal 2012.

The negative outlook represents our expectation of the weak credit measures that will result from the lower earnings.

Standard & Poor's Ratings Services said today that it revised its outlook on Walgreen Co. to negative from stable. We have affirmed our ratings on the company, including our 'A'  corporate credit rating.

"We base the outlook revision on the lack of progress in Walgreen's contract negotiations with Express Script," said Standard & Poor's credit analyst Ana Lai. She commented, "The revision also incorporates the potential for earnings pressure in fiscal 2012 resulting in an erosion of credit protection measures if a contract renewal with Express Script is unsuccessful."

The ratings on Walgreen Co. reflect the company's strong business profile supported by its strong competitive position and favorable industry fundamentals. The rating also reflects the company's intermediate financial profile. Walgreen's strong business profile offsets credit protection measures that historically have been weak for the rating.

The Express Script contract represents $5.3 billion (or 7% ) of Walgreen's total revenue, and represents about 90 million prescriptions annually. This revenue is somewhat concentrated, with the Department of Defense accounting for about 18% of the contract, Med Part D for 11%, and Managed Care Organizations for 45%. It is difficult to predict what portion of the $5.3 billon Walgreen can ultimately retain. However, if Walgreens were to retain a portion of the revenue related to the Express Script contract, and implemented cost savings initiatives to mitigate the impact of the profit loss (40% to 50% of gross profit loss), we still expect earnings to suffer. We believe total debt to EBITDA could deteriorate to about 3.7x in fiscal 2012 from 3.3x in fiscal 2011.

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