Express Scripts Faces Tough Test -- WSJ

By Joseph Walker Features Dow Jones Newswires

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.

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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.

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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)