Express Scripts: The Right Prescription?
We recently added Express Scripts Holdings (ESRX) to the Prime Time Portfolio; the company is the largest pharmacy benefit manager (PBM), serving about 80 million customers, explains Charles Mizrahi, editor of Hidden Values Alert.
Express Scripts is one of three major PBMs that control more than 80% of all prescription drug volume; their main source of revenue is delivering prescription drugs from pharmacies in their networks and the ones they operate to customers.
Most employers and health insurers hire PBMs to manage pharmacy claims, create networks of pharmacies, draw up lists of covered drugs, and negotiate prices with drug companies for medications.
ESRX processed approximately 1.4 billion claims in 2016, which enables it to negotiate lower prices from pharmaceutical companies and pass those savings on to the health plan and customer.
Despite the negative headline news swirling around PBMs, they are not the ones to blame for higher prescription drug prices.
PBMs, and especially ESRX, offer their customers lower prices than they could get on their own due to their enormous buying power. In 2016, prescription drug prices increased by 11%, but customers of ESRX only saw a bump of 3.8%.
While detractors label PBMs as mere middlemen, it is our view that they provide a very much-needed value-added service in keeping prescription drug prices more manageable.
ESRX has recently declined from a high of $80 share (July 2016) to around $63 per share, a drop of 24%. Mr. Market is offering ESRX at an attractive price, and here’s one of the reasons:
ESRX’s largest customer is Anthem (ANTM), which accounted for 17% of revenue in the last fiscal year. Anthem is currently suing ESRX, alleging that it charged “above competitive pricing levels.”
The stock market is pricing in a worst-case scenario for ESRX. Anthem has very few alternatives to ESRX. Switching costs are just too high.
That is why the most likely outcome would be a settlement between ANTM and ESRX, which will take a bite out of ESRX’s earnings. In our view, the market is offering us a financially sound company, with a strong management team, at an attractive price.