Walgreen Co. has already suffered punishing losses since December, when it ended its contract with Express Scripts after a bitter public dispute over pharmacy reimbursement rates.

And with this week’s merger of Express Scripts and Medco Health Solutions Inc, Walgreen will have to contend with an even larger giant.

Now commanding more than 40 percent of the pharmacy benefit management market, north St. Louis County–based Express Scripts Holding Co. likely will demand big concessions from other drug store chains and grocery markets that operate pharmacies.

Walgreen standoff with Express Scripts provides a telling test case of industry fears that the now super-sized Express Scripts, the nation’s biggest PBM, wields too much market power. Critics of the merger have contended the merger will give Express Scripts unchecked ability to force untenable contracts on retail pharmacies, while pushing consumers into getting their drugs by direct mail.

For now, Express Scripts plans to operate Medco as a stand-alone business. Express Script “absolutely will have more negotiating power in dealing with both the chains and the independents,” said Jeff Jonas, a stock analyst at Gabelli & Co, an investment management firm in Rye, N.Y. “But they need to integrate the companies first, which could take up to 18 months.”

Jonas estimates that Walgreens stands to lose $4 billion in revenue in 2012 — about 6 percent of its total revenue — due to lost prescription sales from the Express Scripts contract, and could lose another $3 billion in 2013.

Walgreen Co. Vice President Michael Polzin said the company intends to honor its existing contract with Medco, but would not disclose when that contract is set to expire. Express Scripts spokesman Brian Henry also declined comment on the specifics of the Medco-Walgreens contract.

Employers contract with pharmacy benefit managers to cover their workers’ drug benefits. PBMs then deliver drugs through the mail or reimburse pharmacies for filling prescriptions.

From Walgreen’s perspective, the only thing worse than losing the Express Scripts deal would have been taking it.

“We firmly believe that this decision was in the long-term interests of our customers, employees, and shareholders,” said Michael Polzin, a Walgreens vice president. “We expect the short-term impact to lessen over time. If the same terms are offered to us by another company, it still wouldn’t be in our long-term interest to accept those terms.”

In the meantime, Walgreen will pursue a strategy of aggressively seeking deals with small and mid-sized pharmacy benefit managers and remaking its stores to offer a wider array of health and wellness services to consumers. And it’s trying to get lean for the challenges ahead, cutting costs at its corporate offices in Deerfield, Ill., which began several months ago and will continue, probably including layoffs, Polzin said.

Walgreen has largely shied away from public comments about the Express Scripts-Medco merger, but other drug store and supermarket representatives have asserted that consumers will lose as Express Scripts drives up prices and profits.

Express Scripts, which has built its business on cutting health costs, counters that economies of scale resulting from the deal will in fact drive down consumer prices. “We have a robust and competitive industry, by any analysis,” said Express Scripts’ Henry. “We’re going to have to compete against a large number of PBMs who have their own special niche in the marketplace. ... We believe we have a very healthy relationship with over 60,000 retail pharmacies and that will only continue.”

Walgreens dropped its contract with Express Scripts on Jan. 1 after months of stalled talks, and has seen its rivals — including CVS Caremark, WalMart, and Rite-Aid, along with supermarket pharmacies — openly advertise that their readiness to fill prescriptions of Express Scripts members. And those competitors have picked up a sizeable chunk of Walgreens’ business.

The drug store chain reported March sales of $6.02 billion, a decrease of 4.3 percent from the previous year.

“The negative impact on comparable store prescriptions filled due to no longer being part of the Express Scripts, Inc. pharmacy network was 10.7 percentage points,” Walgreens disclosed Thursday in a news release.

Meanwhile, Moody’s Investors Service on Thursday downgraded Walgreen’s credit rating by one small notch. The rating service voiced concern about the drug chain’s ability to win back Express Scripts customers.

So the conventional wisdom is that the Express Scripts-Medco merger puts Walgreens over an even deeper barrel. Walgreens might get along without Express Scripts but probably can’t afford to lose Medco, said Judson Clark, a stock analyst at Edward Jones & Co. in Des Peres.

“It’s in the best interest of Walgreens to get a deal done,” Clark said.

Walgreens “made an attempt to play hardball with Express Scripts and it didn’t work. It looks like it’ll be difficult for Walgreens to grow with this hanging around their neck.”

Meanwhile, Walgreens is expanding its health-related business beyond the traditional pharmacy. Since November 2010, Walgreens has opened about 200 “wellness format” stores in Chicago, Indianapolis, and through its subsidiary, Duane-Reade locations, in New York.

The stores offer immunizations, health testing, disease management programs, and the treatment of minor ailments such as skin rashes, with the goal of lowering overall healthcare costs. The stores accept insurance payments but also have cash prices.

“We’re looking to focus overall on health, pharmacy and wellness. To help people live well, stay well, and get well,” Polzin said. “And that means creating a new pharmacy and health experience ... Expanding fresh healthy food offerings in the store. Bringing more beauty and cosmetic services.”

— Jim Gallagher of the Post-Dispatch contributed to this report