Express Scripts (
) has been working hard to expand its leading position in the
pharmacy benefit management, or PBM, industry. And it's reaping
St. Louis-based Express Scripts is on track with the
integration of its recent $29.1 billion acquisition of the top
PBM firm, Medco. Analysts expect the company to realize even more
synergies than the originally announced $1 billion.
"The outlook is very bright for them," said Jeff Jonas, an
analyst at Gabelli & Co. "Particularly, it's because of the
Medco merger, which appears to be going much better than first
planned. I think that $1 billion-synergies target can actually
prove low, and I think they are coming faster than expected as
Jonas believes they could achieve $100 million to $200 million
in extra synergies. Once combined, Express Scripts will be the
largest PBM in the market with 1.6 billion in total adjusted
claims or prescriptions processed per year.
Prior to the merger, it handled about half that amount. Its
closest competitor will beCVS/Caremark (
), with the number of yearly prescriptions less than 1
"It's really more of a merger of equals rather than a true
acquisition," Jonas added.
Express Scripts acts as a third-party administrator of
pharmacy benefits. Its clients include employers, health
insurers, managed care organizations, unions and government
agencies. It processes claims of drug prescriptions and provides
additional services such as retail network pharmacy management,
mail order, counseling, therapy management and distribution of
The advantage of PBMs is that they aggregate the purchasing
power of millions of members to negotiate advantageous pricing
and discounts from drugmakers and pharmacies. Often, those
savings are passed on to the members.
Several macro trends have been helping the PBM industry.
One has been a wave of drug patent expirations. This has led
to strong growth in the generic-drug market. Patents on drugs
such as Lipitor, Plavix, Lexapro, Cymbalta, Lunesta and Celebrex
have either expired or will be expiring in the near future.
"As more manufacturers make a generic drug, companies like
Express Scripts benefit since they're able to use their
purchasing leverage to get deep discounts, which allows them not
only to pass along savings to employers, but also to make more
money as well," said Charles Rhyee, an analyst at Cowen &
With a brand-name drug, the pharmaceutical company sets the
price. Since the cost of the drug is already very high, the price
is usually pretty high as well. By contrast, when a drug goes
generic and several manufacturers make it, a PBM will only carry
the lines of one or two manufacturers.
This gives the PBM strong bargaining power. Consequently, the
price of the drug drops dramatically, the gross margin percentage
increases and, as a result, the gross profit is higher as well,
Another up-and-coming area of additional revenue is the
specialty market. This is a market comprising nontraditional
drugs and treatments that come out of biotech firms.They are
usually more complex and have a different delivery mechanism.
"Over the last five to 10 years, we've seen an increasing
shift in drug development away from traditional medications and
into these larger biotech drugs," said Rhyee. "Look at the pharm
index, and look at the biotech index. That just tells you where
money is going and where drug development is happening.
"It's probably less about getting the lowest price since it's
still entirely a brand market, and instead it's really more about
driving compliance and proper utilization, so that it keeps
people out of the hospital. In that case, it's less about gross
profit growth and more about top-line growth."
The regulatory environment and, more specifically, the health
care reform also play a positive though still uncertain role.
Additional health coverage may become available to more than 30
million uninsured Americans through ObamaCare.
Not all of this will go to the commercial market, as a portion
will be covered by Medicaid. However, there will be some volume
gain for the PBMs.
They would get all the extra volume that comes from covering
the uninsured people, said Jonas. "And they (PBMs) don't have any
taxes. They don't have any extra regulations. It's just pure
volume benefit for them."
The industry has been consolidating over the past few years.
Since Express Scripts will have a large chunk of the PBM market,
the company may be more inclined to pursue acquisitions in the
specialty drug space.
"They've always taken a pretty balanced approach," said Jonas.
"I think they would be interested in doing smaller deals, even
now while they are still dealing with Medco. Maybe as we get into
next year, they may think about doing bigger deals again. But if
they can't find a deal, they always just buy back stock
Express Scripts had $16 billion in long-term debt on its books
at the end of last quarter. This is mostly stemming from the
Medco acquisition, but has been dropping rapidly. The company
generates significant amounts of cash flow, while the capital
expenditures are minimal.
"I think these companies are cash-flow-generating machines,"
said Rhyee. "It's a very asset-light business. There's not a lot
of infrastructure. You have several mail order facilities, the
corporate offices, but the bulk of your business is
administrating these benefits. So the power is the scale of your
membership, not the assets that you have."
Express Scripts is scheduled to report its third-quarter
earnings Nov. 5 after the market closes. Analysts tracked by
Thomson Reuters expect earnings of 99 cents a share, an increase
of 25% from the year-ago quarter.