Cigna has the Upper Hand in Kroger Dispute

By Sam Boughedda 

In a research note on Monday, Morgan Stanley’s analysts said Cigna Corp. (NYSE:) has the upper hand in its dispute with Kroger (NYSE:).

The analysts maintained an Overweight rating and $318 price target on Cigna.

He explained to clients that Kroger’s announcement that it will not participate in Cigna’s/Express Scripts pharmacy network “should be immaterial to Cigna,” but if not resolved in the near term, it could lead to Kroger losing pharmacy share.

“Kroger represents 1.2 to 1.5% of Express retail volumes translating to $749.5-993.7 million in sales (1.2-1.5% of Express revenues) by our estimates. While Express likely represents 10% of Kroger’s adjusted scripts and 10% of sales,” explained the analysts. “As Express has the power to direct members to other pharmacies in its network, if Kroger were to lose all its Express related scripts, we estimate this would add another 20 to 30bp on the high and low end in adjusted 30 day scripts to both CVS and WBA.”

The analysts stated CVS and Walgreens are positioned to gain share as members will be redirected to in-network pharmacies. The analysts added that they see two scenarios that could play out:

“Kroger’s announcement comes more than a decade after Walgreens dispute with Express Scripts that lasted from June 2011 thru July 2012 and a dispute with CVS/Caremark that was resolved within 11 days (June 7, 2010 to June 18, 2010). While the dispute with CVS was settled within a short period of time with limited financial impact to either company, the dispute with Express led to Walgreens losing as much as 420bp (a 21% decrease) in market share, losses the pharmacy didn’t fully recover even after the dispute resolution.”