Walgreen Co. should benefit from upcoming health care overhaul coverage expansions and the discipline it showed in developing its loyalty card program, among other positives the company will see in the next couple years, said a UBS analyst who raised his rating on the drugstore chain's shares.

THE SPARK: Shares of the Deerfield, Ill., company slipped after it said March 5 that revenue from stores open at least a year fell 0.6 percent in February, as generic drugs hurt the chain's top line again. Pharmacy revenue came in flat even though prescriptions filled at those stores climbed 6.5 percent.

Revenue from stores open at least a year is considered a key indicator of retailer health because it leaves out results from locations that have opened or closed in the last year.

THE BIG PICTURE: Walgreen is the nation's largest drugstore chain, with 8,071 stores as of Feb. 28.

Drugstores and pharmacy benefits managers, or PBMs, have taken revenue hits for several quarters now due to an increase in generic drug prescriptions. Generics hurt revenue because they are cheaper than brand-name drugs, but they help profitability because they come with a wider margin between the price drugstores pay to buy them and the reimbursement they receive for doling them out.

THE ANALYSIS: Analyst Steven Valiquette said in a Wednesday research note Walgreen should see some "big picture" positive developments.

He said the chain did not overinvest in its loyalty card program to regain customers it lost during a contract impasse with Express Scripts Holding Co., the nation's largest PBM. He said that will help the company's profitability.

Valiquette also noted that Walgreen will see pharmacy business gains due to the health care overhaul, the massive law designed to expand insurance coverage to millions of people. Key coverage expansions for the law will kick in next year.

"We believe the potential for additional profit growth for (Walgreen) related to implementation of health reform ... is underappreciated," he wrote.

SHARE ACTION: Up 4.4 percent, or $1.80, to $42.84 in afternoon trading, while broader trading indexes were nearly flat. The stock had slipped below $41 after the company announced February sales but has since rallied.

 

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