PBM: A Growing Industry - Analyst Blog

Shutterstock photo

Pharmacy Benefit Management ("PBM") solutions play a significant part in the U.S. economy. The companies in this sector have a vital function in controlling prescription drug costs and improving chronic care management.

PBMs work on improving the prescription drug therapy management for patients and help industry players by supplying them with a variety of tools to contain drug costs.

Empirical evidence indicates that PBMs deliver cost savings for consumers, labor unions, employers, health plans and government programs alike. As per the Congressional Budget Office (CBO) estimate, PBMs have the potential to save as much as 30% in total drug spending relative to unmanaged purchasing.

The researchers claim that PBM providers control drug spending by virtue of their advanced technology platforms, encouraging use of generics and other lower-cost medications. The studies also demonstrate that PBMs can limit other health-related costs and improve health outcomes by boosting a patient's adherence to drug therapies.

Patient non-adherence is currently estimated to cost up to $290 billion per year, which represents about 13% of all health expenditures.

Post Medco-Express Scripts Merger Scenario

The mega merger of two of the three largest pharmacy benefit managers - Express Scripts ( ESRX ) and Medco Health Solutions has been the hottest topic in the sector in recent times. The third largest player in this niche was CVS Caremark ( CVS ). These 3 PBMs used to hold roughly 50% of the market (80% after taking into account the contractual arrangements with large plan sponsors).

Following the merger, the combined entity (Express Scripts Holdings Company) has therefore emerged as the dominant player in the PBM market space, catering to more than 150 million prescription drug consumers and 50% of the large employer market.

Both CVS and Express Scripts stand to benefit from increased generic utilization, the shift toward mail orders, strong specialty growth and an aging population. Due to the economic slowdown, a large number of people are moving toward low-priced generic drugs and adopting cost-saving initiatives like mail orders.

The use of generic drugs should increase significantly over the next few years as several branded prescription drugs are scheduled to lose patent protection. Increased generic uptake and higher use of mail orders should help the company improve its margins and profitability.

Between 2008 and 2015, several drugs (annual U.S. sales of about $90 billion) are going off-patent. Additionally, it is estimated that $70 billion worth of major branded drugs will go generic within 2015.

According to the 2010 U.S. health reform legislation, over 30 million uninsured Americans will gain coverage and the U.S. government will increase expense on prescription drugs pursuant to the expansion of Medicaid and Medicare Part D plans. This will help drive prescription sales going forward.

CVS in this regard, entered into deals with 3 large Medicaid players , Amerigroup Corporation ( AGP ), Molina Healthcare ( MOH ) and Aetna ( AET ). These three major health insurers are engaged with numerous small players which should help CVS drive growth in its PBM business.

Express Scripts on the other hand, is portraying solid growth after the Medco integration with an encouraging 2013 selling season and a generic tailwind that is expected to persist through 2014. The company also expects to generate savings of $1 billion on the complete integration of Medco Health's operations into Express Scripts' business adding further synergies to the operation.

Moreover, the favorable resolution of Express Scripts' long-standing dispute with retail giant Walgreen's ( WAG ) in July, has been a major positive for the company.

With this resolution, Express Scripts will extend its services to over 64,000 pharmacies across the U.S. Per the new agreement, Walgreen's will start filling prescriptions from Express Scripts' customers from September 15, 2012. The favorable resolution has removed a major overhang on Express Scripts shares.

Another Consolidation in PBM Space

The PBM Institute's directory lists more than 40 members.  However, the successful acquisition of Express Scripts and Medco motivated others in the field to integrate. In July this year, another standalone PBM company Catalyst Health Solutions was acquired by its arch rival SXC Health Solutions Corp.

With this acquisition, a new company -- Catamaran Corporation ( CTRX ) -- was formed. While these PBM providers work independently, others are affiliated with major health insurers or health plans like those from United Health and Aetna.


As health care costs continue to climb despite the current economic doldrums and severe budget pressures, the need for innovative solutions like PBM continues to grow. PBM's growing role in the clinical management of chronic diseases or complex health conditions is undeniable given that these patients account for approximately 96% of drug spending and 75% of total health care expenditures nationwide.

Over the long term, we have an Outperform recommendation on Express Scripts with short-term Zacks #1 Rank (Strong Buy). However, we remain Neutral on CVS and Catamaran Corporation. Both these companies retain a Zacks #3 Rank (short-term Hold rating).

AETNA INC-NEW (AET): Free Stock Analysis Report
CATAMARAN CORP (CTRX): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
MOLINA HLTHCR (MOH): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: AET , CBO , CTRX , CVS , MOH

More from Zacks.com




Equity Research
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by BankRate.com