By Joseph Walker
Express Scripts Holding Co., the largest administrator of
prescription-drug benefits in the U.S., is facing an identity
crisis as it grapples with replacing $17.1 billion in annual
revenue following the loss of its biggest customer, health-insurer
Anthem Inc.
Express Scripts, based in St. Louis, has for years prided itself
on its independence, even as its pharmacy-benefits competitors were
gobbled up by other players in the health-care industry, including
insurer UnitedHealth Group Inc. and retail-pharmacy chain CVS
Health Corp.
Express Scripts has said its focus on prescription-drug spending
and lack of entanglements with other branches of health care
enabled it to concentrate on driving down costs for its clients,
which include large employers, health insurers and
government-funded health programs.
But the strength of Express Scripts' stand-alone business model
faces a significant test after the company's said late Monday that
Anthem doesn't intend to renew its 10-year contract when it expires
at the end of 2019.
Concerns about Express Scripts' future, including whether
Anthem's defection will lead to more customer losses, sent shares
of Express Scripts plunging 11% to close at $60.01 on Tuesday.
Express Scripts said Anthem hasn't yet provided it with formal
notice that it is severing the relationship.
Anthem didn't immediately respond to a request for comment
Tuesday.
Shares of pharmacy-benefits competitors that could potentially
win Anthem's business rallied after the news Tuesday.
CVS rose 2.7% to $82.17, and UnitedHealth gained 1% to
$174.04.
Shares of Anthem, which some analysts expect could attain
significant savings by leaving Express Scripts, rose 2.4% to
$172.46.
In an interview on Tuesday, Express Scripts Chief Executive Tim
Wentworth said the company would survive the loss of Anthem.
Express Scripts will retain its purchasing power to negotiate
discounts from drugmakers and pharmacies, even without Anthem, he
said.
And unlike its more diversified competitors, "100% of our focus
is on drug costs and pharmacy," Mr. Wentworth says.
"We are very powerful as an independent entity, with or without
Anthem," Mr. Wentworth says. "We don't have competing businesses
fighting for capital. CVS has to decide, are we going to build
stores, upgrade our shelves," and so on, he said.
Express Scripts' major competitors say their integration with
other supply-chain players enables them to more comprehensively
manage drug spending and provide better customer service.
UnitedHealth's OptumRx unit, for instance, touts its ability to
analyze patients' entire medical record for patients who are also
enrolled in its health-insurance services. Optum says that enables
it to steer patients to the best treatments, and to detect
potential health risks in the treatments that patients are
receiving.
CVS's Caremark unit, the second largest pharmacy-benefits
manager, allows customers to pick up 90-day prescriptions from CVS
retail stores or receive them through the mail, a more flexible
approach than some other PBMs that primarily dispense 90-day
prescriptions via mail-order.
These extra capabilities can be a "tiebreaker" when clients are
trying to decide between hiring PBMs that have offered similar
overall pricing, says Craig Oberg, a consultant at the Burchfield
Group, who advises employers in their contracting with PBMs.
Express Scripts also faces the risk that it loses more customers
who worry that it will have to cut costs and conduct layoffs to
make up for the Anthem loss, resulting in poorer service for
remaining customers, Mr. Oberg said. "Clients are going to be
asking how does this impact me?" he said.
To be sure, Express Scripts is likely to remain formidable
player in the PBM industry. It has strong brand recognition and
marquee clients that include the Department of Defense and Wal-Mart
Stores Inc. The company also has $3.2 billion in cash and three
years until Anthem's exit to do deals and win other new
clients.
Express Scripts disclosed that it earned $2.25 billion from
Anthem last year, or nearly a third of its profit before taxes and
other items. Revenue from the contract represented 17% of its
$100.29 billion in revenue in 2016. Just as concerning was that
Express Scripts earned $10.24 for every prescription dispensed to
people insured by Anthem, or nearly double what it made across all
prescriptions.
The profit discrepancy between Anthem and the rest of its
customers "implies that their underlying business is in poorer
shape than most of the market understood," says Ross Muken, an
analyst at Evercore ISI. Going forward, "they clearly won't have
the Anthem piece hiding any deficiencies," he said.
The split with Anthem is the result of a longstanding contract
dispute between the companies that sprang into public view last
year, when Anthem publicly alleged it was being significantly
overcharged by Express Scripts. Anthem sued Express Scripts last
year for about $15 billion in damages related to the alleged
overcharging and other matters, and for the right to terminate its
contract early.
Express Scripts countered that its terms were the result of a
unique contract that the parties signed in 2009, when Express
Scripts agreed to pay $4.68 billion to purchase Anthem's in-house
pharmacy benefit management business, in exchange for Anthem
agreeing to pay a higher price for Express Scripts' services over
an exclusive 10-year contract. The court dispute is ongoing.
"Express clearly misjudged Anthem's potential risk of leaving,"
says Evercore's Mr. Muken.
Write to Joseph Walker at joseph.walker@wsj.com
(END) Dow Jones Newswires
April 26, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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