Will Lawsuit Hurt Express Scripts?

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If Express Scripts (Nasdaq: ESRX) had a bad day last week, yesterday things got a lot worse. New York Attorney General Eliot Spitzer followed through on an investigation and Wednesday filed a lawsuit accusing the pharmacy benefits manager of fraud. A judgment in Spitzer's favor could easily exceed $100 million, the amount Spitzer's office says Express Scripts stole when it failed to provide the state with rebates it had coming.

The centerpiece of the case is Spitzer's claim that Express Scripts failed to live up to a contract that required it to negotiate the lowest prices for drugs under health care plans for state workers. The complaint alleges that Express Scripts violated civil law by pocketing rebates it obtained from drug companies instead of returning them to the state. It also says that the firm inflated the cost of generic drugs and induced physicians to switch patients' prescriptions so it could charge fees to new drug providers.

For its part, Express Scripts issued a prepared statement saying that it "saved the state of New York more than $2 billion in drug costs since 1998." It also promised to vigorously defend itself in court.

Still, it doesn't look good for Express Scripts. The charges coming from Spitzer's office are accompanied by an investigative demand from Vermont's attorney general and pending demands or subpoenas from 18 other states. And while investigations in this industry have become commonplace, being at the business end of a Spitzer suit hasn't proved profitable. Just ask Bank of America (NYSE: BAC), Bank One (NYSE: ONE), and Janus (NYSE: JNS) what they think.

Although investors seem to be over the initial jitters arising from Express Scripts' problems, the stock is still down more than 12% since the bad news first broke last week. It's easy to understand why. The $100+ million Spitzer is seeking nearly equals its cash on hand. And that's only one suit. Indeed, the conclusion to Express Scripts' torrid affair looks to be anything but quick.

Much of my e-mail lately suggests that Spitzer's barrage of lawsuits has gone too far. Has it? Or is he the crusader we need in troubled times like these? Give us your take at the Political Asylum discussion board. Only at Fool.com.

Fool contributor Tim Beyers thinks Spitzer is doing just fine, thanks. He owns no shares in the companies mentioned, and you can view his Fool profile here.