VIAGRA NEWS

Source: Smartmoney.com

Date: 22-Dec-2006

Author: James Covert

NEW YORK -(Dow Jones)- Walgreen Co. (WAG) said profit jumped 25% in its fiscal first quarter as the new Medicare drug benefit boosted prescription sales despite the lower margins it carries.

The Deerfield, Ill., company, which is the nation's largest drug-store chain by sales, reported net income of $431.7 million, or 43 cents a share, for the quarter ended Nov. 30, up from $345.6 million, or 34 cents a share, a year earlier.

Results easily beat analysts' average estimate of 41 cents a share, according to a survey by Thomson Financial. Walgreen shares on the New York Stock Exchange recently were at $46.55, up 1.3% from Thursday's close of $45.96.

"Overall, we believe that the company will likely gain additional momentum from here on," Raymond James analyst John Ransom said in a Friday research note. Uncertainties about the ramp-up of the Medicare Part D program, which has transferred about 6.2 million patients from Medicaid, "appear to have lapsed," Ransom added. Investors should assume Raymond James is pursuing investment-banking relationships with Walgreen.

Sales, which the company had reported earlier this month, rose 17% to $12.71 billion, up from $10.9 billion a year earlier and surpassing analysts' estimate for sales of $12.55 billion. Prescription sales, which accounted for 65.7% of the total during the quarter, climbed 18.7%.

Gross margin rose more than half a percentage point to 28.14%, boosted by increased generic-drug sales and a rise in so-called front-end sales, or sales of general merchandise, which carry higher margins than prescriptions. Some of that benefit, however, was offset by lower margins under the Medicare Part D program and by an overall sales shift toward the pharmacy business.

"We're earning less money on prescriptions for Medicare Part D patients who previously paid cash for their medications, but overall the program has benefited us because of the increased business we're attracting under it," President and Chief Executive Jeffrey A. Rein said in a written statement.

However, costs for selling, occupancy and administration rose slightly on expenses related to acquisitions and provisions for legal matters. Walgreen said it partially offset those costs by keeping a lid on salary and occupancy costs. "Our store managers helped generate strong sales growth while controlling their costs, and their staffs did an excellent job of maintaining high customer service levels," said Rein.

At Nov. 30, Walgreen operated 5,580 stores in 47 states and Puerto Rico, and the company plans to open 500 new stores during fiscal 2007. Earlier this year, Walgreen purchased the Mid-Atlantic-based Happy Harry's drug chain, which added 76 stores.

Shares of conventional drug chains have been pressured since Wal-Mart Stores Inc. (WMT) rolled out its $4 generic-drug prescription plan in September, as some investors have feared that lower generic-drug prices industrywide could squeeze margins. Target Corp. (TGT) has matched Wal-Mart's $4 offer, which covers 30-day prescriptions on about 150 generic drugs. But Walgreen and rivals CVS Corp. (CVS) and Rite Aid Corp. (RAD) haven't lowered their prices, saying they are already competitive.

Rite Aid turned a third-quarter profit Thursday and beat analysts' estimates amid strong pharmacy sales, adding that the effects of Wal-Mart's $4 prescription plan have been "immaterial" to its business. The No. 3 drug chain's stock hit its 52-week high of $5.60 on Thursday following the earnings report.

CVS Corp.'s move last month to acquire pharmacy-benefits manager Caremark Rx Inc. (CMX) spurred concerns that the resulting titan would lead to efficiencies that would also lower drug prices and hurt profits for its rival. CVS has vied in recent years with Walgreen for the No. 1 spot in drug retailing, with Walgreen leading in sales and CVS in number of stores.

Pharmacy-benefit managers such as Caremark and Express Scripts Inc. (ESRX), which launched its own surprise bid for Caremark earlier this week, control the flow of medications through retail stores and health institutions.

Walgreen already operates a pharmacy-benefits manager, called Walgreens Health Initiatives. However, in August, it lost its major corporate client, Ovations, the senior health-care unit of UnitedHealth Group Inc. (UNH). Walgreen had been handling Medicare Part D prescriptions for Ovations, but UnitedHealth decided to bring the processing in-house.