Wednesday, July 7, 2010

Who Are You Going to Believe – Me or Your Lying Eyes?

Trial lawyers have a cheap, but effective trick when they catch a witness in an inconsistency. They simply ask, “Well, are you lying now or were you lying then?” I sometimes get the same feeling when I compare management statements with the risk factors disclosed in SEC filings.

For example, there was a recent blog post at Footnoted ( 29, 2010) that pointed out exactly just such a discrepancy between management and the lawyers over the impact of Walgreens’ participation in prescription drug plans administered by CVS, a rival drugstore chain.

Walgreens and CVS, bitter rivals, also do business together by virtue of the fact that CVS owns Caremark, a large pharmacy benefit management company. Many prescription takers are in plans administered by Caremark, but choose to get their prescriptions filled at Walgreen retail stores. This, of course, was bound to be a troubled relationship, and sure enough, earlier this summer, Walgreens announced that it would no longer take new prescription plans administered by Caremark. After CVS, in a fit of pique then announced that it was terminating Walgreens participation in all pharmacy benefit plans, Walgreens released a statement by Kermit Crawford, executive vice president of pharmacy stating: “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.”

Walgreens and CVS subsequently reached a new agreement and that was that until Walgreens filed its most recent 10-Q where, out of the blue, a new and previously undisclosed risk factor was discussed. In what seems to be a direct acknowledgement of the potential impact of losing the Caremark plans, the risk disclosure states:

“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.”

Now, I suppose you could say that Walgreens was merely posturing in saying that they were confident they could continue to grow their business in spite of losing the Caremark business, but that’s the sort of thing you do at the negotiating table, not in a press release. Investors expect and deserve consistency. The original statement is patently at odds with the risk statement, so I’m left with the basic question: Should I believe what you say now or what you said then?

(Full and fair disclosure: by virtue of having worked at Walgreens for over twenty years, the author has a significant financial interest in the company. I want them to get it right, which is why I get so upset when they screw up.)

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