By JON KAMP

More than two months after drugstore giant Walgreen Co. and
pharmacy-benefit manager Express Scripts Inc. said contract-renewal talks
had broken down in their multibillion-dollar relationship, "negotiations
remain at an impasse," according to Walgreen.

In documents filed Tuesday with the Securities and Exchange Commission,
Walgreen said it has started informing patients it won't be part of
the Express Scripts network starting next year. The drugstore chain
previously estimated that leaving the network could cost it about $5.3
billion in annual sales, or nearly 8% of its total. But it also had
warned of the longer-term consequences of accepting unfavorable terms
from Express Scripts.

"This year, Walgreens has worked hard to reach a contract-renewal
agreement with Express Scripts, the pharmacy benefits manager, to continue
serving its clients and patients in 2012 and beyond," Walgreen said in
the filing.

"We have offered a number of cost-saving concessions, which, in effect,
would hold annual average prescription-reimbursement cost increases to
within an estimated 2% annually over the next three years," Walgreen
said. It added that its costs are in line with other retail pharmacies.

An Express Scripts spokesman said it also is preparing clients and
members for Walgreen to leave its network starting Jan. 1, although
Express Scripts said it believes its customers will have convenient
options even without Walgreen's thousands of outlets. Walgreen has
suggested otherwise while indicating Express Scripts could stand to lose
customers as a result of the rift.

"We are still open to Walgreens being in our network, but only at a
rate that's right for our clients," said Express Scripts spokesman Brian
Henry. "They would be the highest-cost pharmacy in our network with its
current proposed rates."

Pharmacy-benefit managers like Express Scripts handle prescription-drug
benefits and claims for employers and health-insurer clients. In the past,
PBMs have worked with drugstores to secure deals for their members, but
the relationship has become more contentious as PBMs ramp up competition
through their own mail-order pharmacies.

Drugstores have opposed Express Scripts' planned acquisition of rival
PBM Medco Health Solutions Inc., which would create a clear industry
heavyweight. That cash-and-stock deal was valued at $29.1 billion when
first announced in July.

Walgreen said its promotion of 90-day prescriptions, which mail-order
pharmacies offer as an alternative to the monthly prescriptions retail
outlets traditionally use, has been a source of friction with Express
Scripts. Though these longer-term prescriptions could save money at the
retail level, Express Scripts rejected Walgreen's offer to promote them,
Walgreen said in its filing.

Analysts have indicated Walgreen has more immediately at stake than
does Express Scripts if the two sides can't find common ground. Express
Scripts customers can fill their prescriptions elsewhere.

Leerink Swann, analysts said Friday that they don't believe Express
Scripts' 2012 retention rate has been harmed by the Walgreen situation.

Walgreen raised the idea of potential business losses for Express
Scripts if that company's customers didn't have access to the nation's
largest retail pharmacy chain, which has nearly 8,000 locations. Walgreen
also said Express Scripts may be out of compliance with provisions in
customer contracts, especially with respect to customers' access to
24-hour pharmacies. It cited a dearth of 24-hour pharmacy services in
places like Topeka, Kan., and Colorado Springs, Colo.

Express Scripts rejected the idea it could run afoul of such contract
terms. "We will meet all client access requirements even without
Walgreens in the network," Mr. Henry said. Express Scripts said there
are 56,000 other pharmacies in its network and that most people can find
a non-Walgreen option within a short drive or walk.

At midafternoon Tuesday on the New York Stock Exchange, Walgreen shares
were up 1% at $35.11. The company also said Tuesday that its same-store
sales rose a stronger-than-expected 5.6% in August.

In midafternoon trading on the Nasdaq Stock Market, Express Scripts
shares were down 12 cents at $45.22. The company disclosed Friday that
the Federal Trade Commission has asked for more input on its proposed
PBM Medco acquisition, extending the time period for an antitrust review.
—Maxwell Murphy contributed to this article.