Spinning hidden meanings at Walgreen …

June 29, 2010

Companies have to disclose all kinds of things to investors. Companies dearly like to spin those disclosures to seem as positive as possible. In a pinch, guess which impulse wins out?

Look no further than Walgreen Co. (WAG) the big pharmacy and drug-store chain, which filed a quarterly report with the SEC on Friday that underscored how much investors need to read between the lines when it makes public statements.

In the filing, Walgreen includes a new risk factor, supplementing those previously disclosed in its October annual report and subsequent quarterlies. Here’s the substance of it:

“We derive a significant portion of our sales from prescription drug sales reimbursed through prescription drug plans administered by pharmacy benefit management (PBM) companies. … If our participation in the prescription drug programs administered by one or more of the large PBM companies is terminated, we expect that our sales would be adversely affected, at least in the short term. If we are unable to replace any such lost sales, either through an increase in other sales or through a resumption of participation in those plans, our operating results may be materially adversely affected.”

The most noteworthy part of this risk factor, of course, is its conspicuous absence while the company was pursuing its much-publicized spat with CVS Caremark (CVS) earlier this month. In fact, quite the opposite — in Walgreen’s June 7 press release announcing that it would bar new CVS pharmacy plans from its stores, the company quoted Chief Executive Greg Wasson as saying that

“Unfortunately, as a result of CVS Caremark’s pharmacy benefit management practices toward Walgreens, it no longer makes good business sense for Walgreens to be part of their network for new and renewed plans.”

When CVS responded by saying it would excise Walgreen pharmacies for all its plans, Walgreen quoted an executive vice-president saying that the company expected such a move — and that it was no big deal:

“We are disappointed but not surprised that CVS Caremark has taken this action. … Regardless of CVS Caremark’s decision, we are confident of our ability to continue to grow our business as a provider in hundreds of other pharmacy benefit networks and as a direct provider to employers.”

So which is it? Does being cut off from “one or more of the large PBM companies” threaten that “sales would be adversely affected” and ultimately that Walgreen’s “operating results may be materially adversely affected”? Or did Walgreen think keeping the CVS relationship “no longer [made] good business sense” and that the company was “confident of our ability to continue to grow our business” without it?

No doubt, any lawyer worth his or her salt can thread that needle and show both to be perfectly accurate. But should investors have to perform the same sort of mental gymnastics?

Image source: quapan via Flickr

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