4 Min Read
(For more Reuters DEALTALKS, click on)
By Carl O'Donnell and Michael Erman
NEW YORK, April 26 (Reuters) - The loss of a multi-billion dollar contract with Anthem Inc comes with a silver lining for some shareholders of Express Scripts Holding Co : a higher likelihood that the pharmaceutical benefits manager (PBM) gets scooped up in a deal.
Express Scripts' shares fell 11 percent on Tuesday, the day after the company said its contract to negotiate drug prices for Anthem - worth around a third of its annual adjusted earnings - would not be renewed once it expired in 2019.
As a result, Express Scripts' market value has sunk to $37 billion from its highs around $53 billion at the end of last year, putting it in the crosshairs of potential buyers.
"Post the bludgeoning, we think management will have to take a hard look at the company's prospects through the roll-off and decide the path forward... that is likely to maximize value creation," said Evercore ISI analyst Ross Muken in a research note.
He said that another PBM, Medco Health Solutions, opted to sell itself to Express Scripts in 2011 when Medco lost a number of its largest customers.
Tim Wentworth, the CEO of Express Scripts, was an executive at Medco at the time.
After the loss of Anthem's business, Wentworth touted the benefits of remaining independent for its customers and its bottom line. But that could change if buyer interest emerged.
His company has long been a potential target for health insurers or pharmacies looking to expand into drug benefits, but the uncertainty surrounding its contract dispute with Anthem has kept deal talks on the shelf, several investment bankers said, asking not to be identified because they were not authorized to speak with the press.
Among the most logical buyers are health insurers like Aetna Inc and Humana Inc, which are beginning to scout for new deals, several bankers and analysts said. Express Scripts and Aetna declined comment. Humana was not immediately available for comment.
Insurers can leverage their large patient populations to help PBMs boost bargaining power with drugmakers. That could become more important as scrutiny of PBMs' pricing practices puts pressure on their margins.
"We’re seeing managed care look to own more of the capability in-house," particularly as pricey new drugs in areas like oncology increase the benefits of coordinating insurance coverage with drug benefits, said Michael Baker, an analyst at Raymond James.
Some insurers have already adopted the model. UnitedHealth Group Inc pioneered the strategy with its OptumRx drug benefits unit, which it doubled down on in 2015 with a $12.8 billion acquisition of Catamaran Corp.
A consortium of 14 BlueCross BlueShield plans together own Prime Therapeutics, which has about 20 million members, and Humana also has a smaller drug benefits manager called Humana Pharmacy Solutions.
Potential interest could also come from a large pharmacy like Walgreens Boots Alliance Inc or even, at the right price, a private equity firm, analysts and bankers said.
"They generate a lot of cash and they don’t have a lot of debt on their balance sheet," said Brian Tanquilut, an analyst at Jefferies. "At a certain price it could be an asset that would be very attractive to private equity."
Walgreens declined to comment.
Anthem said on Wednesday that it has not yet made a final decision on the contract and hopes to reach an amicable resolution on a federal lawsuit it filed against Express Scripts for $15 billion, alleging that it was being overcharged for prescriptions by $3 billion a year. (Editing by Bill Rigby)