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
Patient non-adherence is currently estimated to cost up to $290
billion per year, which represents about 13% of all health
Post Medco-Express Scripts Merger Scenario
The mega merger of two of the three largest pharmacy benefit
) and Medco Health Solutions has been the hottest topic in the
sector in recent times. The third largest player in this niche was
). These 3 PBMs used to hold roughly 50% of the market (80% after
taking into account the contractual arrangements with large plan
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
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
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
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
). These three major health insurers are engaged with numerous
small players which should help CVS drive growth in its PBM
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
) 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 --
) -- 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
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
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