Please ensure Javascript is enabled for purposes of website accessibility

Express Scripts Takes Heavy Fire From Anthem

By Motley Fool Staff - May 2, 2017 at 9:41AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Anthem wants billions of dollars from Express Scripts, and that could unravel their business relationship.

After Anthem (ANTM 2.71%) threatened to stop doing business with pharmacy benefit manager Express Scripts (ESRX), shares of the PBM sank. Can Express Scripts survive the loss of its biggest customer?

In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss why these two healthcare titans are battling and what could end up happening if the two don't call a truce.

A full transcript follows the video.

This video was recorded on April 26, 2017.

Kristine Harjes: We have some news to dig into regarding one of the nation's major PBMs, but first, I figure we should give some background on what exactly is a PBM?

Todd Campbell:
 To keep it very top level and make it very easy to understand, each one of these payers, insurers, or it could be a company that self-insures their employees, has to go out individually and negotiate with drugmakers on pricing. That's not very efficient. You're not likely to get the best deal, because you don't have a lot of bargaining power. So what PBMs do is allow a lot of different insurers and different payers to bond together under this umbrella, and they'll negotiate the best price for you, pass along that savings to you, and take a small piece for themselves.

Harjes:
 Right. They're basically leveraging their size to try to get prices down, and they take a cut of those savings. Because of that, they've been painted in a sketchy light lately, especially by drugmakers, saying, "We're not responsible for astronomical drug prices; it's actually the PBMs." I don't know, I think they've been kind of successful in tainting the reputation of PBMs. That might not even be the right way to phrase it, because I don't think they had a reputation before people really started thinking about this issue. 

Campbell:
 Yeah, Kristine, I think a few years ago, they were being looked at as part of the solution. I think the drug industry has painted them now as part of the problem, and they've done a pretty good job marketing that to individuals.

Harjes: Yeah. It's interesting. Personally, I don't know what my opinion is on whether they're good guys or not, but I think it's important to understand that they are part of this whole relationship, and they're just one more cog in the wheel, they're one more piece of this puzzle, and they're going to take a cut. So they are part of the equation of why drug prices are the way they are, for better or for worse.

Campbell:
 Yeah. The argument would be that they have to save you more, and they're only taking a cut of what those savings would be, so if they didn't exist, the cost would be higher. That would be the counter-argument, and the value they add. But maybe the value they're adding isn't as great as it sounds, at least according to Anthem.

Harjes:
 Exactly. That brings us to the news-y part of the segment, and why we wanted to address this to begin with. Express Scripts, which is one of the major United States PBMs, lost about 12% of their stock price yesterday, Tuesday, on the news that Anthem, which is one of the big health insurers, is not planning on renewing its contracts that it had with Express Scripts when they get to their expiration in 2019.

Campbell:
 This is an ongoing battle between Anthem and Express Scripts that's been going on more than a year.

Harjes: Yeah. It was the very first thing that Express Scripts addressed in their earnings call. They basically said, "This is the latest on this deal, Anthem has signaled to us that there is no way we can reach a compromise, so they're not going to renew their contracts." Express Scripts, to their credit, was extremely transparent about exactly what will happen financially when/if they lose this as well as some other big clients. Anthem, in general, has been very pushy about demanding things from Express Scripts. They want Express Scripts to give them $3 billion a year in order to keep this contract. When Express Scripts opened up their books and said, "Look, this is how much money we're making from this deal, this is what you're asking for," it just wasn't possible to make those ends meet.

Campbell:
 Yeah. This all began back in 2009, when Anthem sold their internal PBM business to Express Scripts and, at the time, inked a 10-year deal for Express Scripts to handle this part of the business for them.

Harjes:
 Right, hence the 2019 expiration.

Campbell:
 Yeah. As part of that language, they were supposed to be able to get some price rebating back at the end of the year. They had been projecting that to be a fairly large sum. Last year, Anthem came out and said, "Listen, we think Express Scripts is charging us $3 billion a year too much for the drug that it's handling. They're not passing those savings along to us that they have promised to pass along." Shortly thereafter, Anthem filed a lawsuit, saying to Express Scripts, "Either pay up or we're going to walk away. Give us the option, either or." Obviously, the two could not find a middle ground on this, and that's what prompted Express Scripts, finally, to say on their earnings call, "Listen, they told us they're not going to renew in 2019, and that means we're going to lose a big chunk of our EBITDA." To put that in perspective for investors on why this was such a big deal and caused shares to plummet, last year, Anthem's business represented almost a third of Express Scripts' EBITDA. So this is very substantial, their biggest customer, very substantial part of the business. No wonder investors were like, "Oh my God, what's going on, what's going to happen in a few years?"

Harjes: Right. Express Scripts' stock has suffered pretty considerably because of this. They're down about 30% since the fighting with Anthem began. If you look at the aftermath and what's actually going to happen, it'll take a little bit of time to be fully felt. When Anthem first came to Express Scripts, back in 2009, as you were saying, it took three full years for the transition. Even post-2019, the impact won't be immediate. But still, it will be really difficult to replace this business. I can't imagine what other health insurer Express Scripts might try to forge a deal to replace what they're losing with Anthem. You have UnitedHealthcare, that's a huge insurer, but they have their own PBM. Humana has its own, Cigna has a 10-year contract with Catamaran, which was acquired by UNH. Then, Aetna has a contract with [CVS Health], which also has a PBM that expires in 2019. So that could be kind of interesting.

Campbell:
 Yeah, this is an area where there are always companies in payers moving back and forth, but it's usually not the big ones. It's usually not the players like Anthem.

Harjes:
 Right, because they're long-term contracts.

Campbell:
 Yeah. Now, I think you might look at the shares today, if you're listening to this on the day we record here, and say, "But shares are up." That's because there was some conversation on Anthem's investor call today that indicated that maybe the door was still open for some negotiation. Obviously, Express Scripts doesn't want to give Anthem all the money that Anthem wants, Anthem seems to want that money, I don't know where they would find a middle ground. But it's giving a little bit of support after that big drop in shares today, at least.

Harjes: Right. Express Scripts has made it very clear that they're still willing to negotiate. It seems like Anthem is playing hardball here, but I honestly wouldn't be shocked if Anthem ended up finding some way to compromise.

Campbell:
 One of the takeaways here, Kristine, for investors should be, always be a little bit cautious when one customer accounts for a very big percentage of a company's business. Right?

Harjes:
 Absolutely, that's a great takeaway. That single risk factor is not something to be discounted.

Campbell:
 Now, that doesn't mean that you can't go in and make some money on Express Scripts. I think there's still a need for a business like Express Scripts. The debate would be, is Express Scripts the biggest player in the PBM business? Or the best player, I should say, from here in the PBM business? Maybe CVS is the best player because they have the most gain.

Harjes: Yeah. If CVS won Anthem, that would certainly make them the biggest PBM.

Campbell:
 Yeah. You also have the potential for UnitedHealthcare, which is obviously a lot more diversified because it runs its own PBM, but it's also the largest health insurer as well. An investor might not want to own a PBM and a separate health insurer in their portfolio, they want a combination of the two, then UnitedHealthcare fits the bill in that way.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Express Scripts Holding Company Stock Quote
Express Scripts Holding Company
ESRX
Anthem, Inc. Stock Quote
Anthem, Inc.
ANTM
$482.58 (2.71%) $12.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.