What happened
Shares of the top pharmacy benefits manager (PBM) Express Scripts Holding Company (ESRX +0.00%) rose by 15.8% in December, according to data from S&P Global Market Intelligence.
The catalyst? Investors were apparently excited about Express Scripts' $3.6 billion acquisition of the privately held medical benefits management eviCore that closed last month. Besides being immediately accretive to earnings, this deal seems to be a prelude to additional acquisitions by Express Scripts, as the company attempts to protect itself from a rapidly consolidating and increasingly competitive industry.
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So what
The PBM space is set to go through a major shift in the coming years. The proposed $69 billion merger between the country's largest pharmacy, CVS Health Corporation (CVS 1.57%), and one of the largest health insurers Aetna (NYSE: AET) seems to indicate that the industry is moving toward eliminating the traditional role of PBMs as the middle-men in the prescription drug market. If true, Express Scripts, as the largest stand-alone PBM, would obviously be in a terrible position if it failed to diversify.
Now what
Express Scripts is undoubtedly in a tough position moving forward. While there's no telling how the CVS-Aetna merger will ultimately affect the dynamics of the PBM industry as a whole, Express Scripts must figure out a way to cut fat and deliver as much value to customers as possible in order to remain a viable operation over the long haul. Fortunately, the eviCore deal does go a long way toward eliminating inefficiencies in Express Scripts' underlying business model, and it should give the company another year or two to figure out how best to deal with this changing landscape as a result.
The bottom line is that even though the fate of the PBM industry is still unclear in the wake of this game-changing merger between CVS and Aetna, Express Scripts does have the financial flexibility to adjust course as needed. This eviCore deal is clearly a much-needed first step toward that larger goal. And that's why this deeply discounted healthcare stock might turn out to be an incredible bargain for investors that are willing to let this industrywide metamorphosis play out.
