Showdown at the Rx Corral August 4, 1999
The changing nature of how drugs are doled out to the sick and infirm in this country was back in the news today, sending various stocks lower on fears that there may be an impending showdown at the Rx corral pitting the drugstore cowboys and their online sidekicks against the pharmacy benefit management (PBM) posse.
In a research report today, Merrill Lynch analysts Mark Husson and Sandhya Raju attempted to handicap who would be left standing after the bullets fly and the dust settles. The share prices of soon-to-be online prescription fillers CVS (NYSE: CVS) and Walgreen (NYSE: WAG) were singled out by the brokerage firm as headed toward Wall Street's version of Boot Hill, and both companies had their near-term ratings taken out and shot. But the carnage didn't end there, as other cowpokes with their branding irons in the prescription fire, such as Rite Aid (NYSE: RAD), Express Scripts (Nasdaq: ESRX), and drugstore.com (Nasdaq: DSCM), saw their stocks gunned down as well.
The High Noon references aside, what is really at issue here is how the PBMs such as Merck's (NYSE: MRK) Merck-Medco unit will respond when CVS and Walgreen launch their full-service online pharmacy sites in the coming weeks. These sites will effectively give CVS and Walgreen a mail-order prescription filling ability that they have lacked up to this point, encroaching on what has traditionally been the PBMs' turf. Under one scenario suggested by Husson and Raju, the events could unfold like this:
-- The drug retailers start filling 30-day prescriptions for their new online customers
-- The PBMs, fearing their mail-order businesses are at risk, refuse reimbursement requests for orders filled online
-- The online pharmacies respond by abandoning the PBM networks
-- Upset network members flood the PBMs with nasty letters and phone calls when they can't get their prescriptions filled
This could possibly happen, providing a short-term "Choose your own pharmacy adventure"-type game whose ultimate outcome hinges on the choices made by both parties in the earlier rounds. This may be fun for sell-side analysts to think about, but it is a less-than-desirable situation for long-term investors to mull over. However, the short-term bumps that no doubt lie ahead notwithstanding, eventually one of two things will happen -- the retailers and PBMs will either learn to live with each other and make the best of the new online delivery environment, or the two sides will meld together through joint ventures or all-out combinations.
This has already occurred to a great extent at Rite Aid, which is playing all three sides of the pharmaceutical pyramid by offering bricks-and-mortar prescription services, maintaining an online presence through its partnership with drugstore.com, and controlling one of the largest PBMs out there, PCS. Whether this model will end up winning the entire retail drug distribution shootin' match is still up in the air, however. In the coming weeks, investors should get a clearer picture of how the long-term pharmacy showdown will pan out.
Brian Graney (TMF Panic) (TMF Panic)