Looking at some recent news stories, I see more consolidation among Pharmacy Benefit Managers (PBMs). Here are my 5 reasons.
1) The FTC -- Last week, the Federal Trade Commission (FTC) allowed Express Scripts' (ESRX) acquisition of Wellpoint's (WLP) Next Rx in-house PBM business to proceed. As I see it, this deal solidifies Express Scripts' position among the top three PBMs. (BTW, the FTC's non-action is bad news for the independent pharmacist's quixotic quest to undo the CVS Caremark deal.)
2) Financial Value of In-House PBMs – The valuation of NextRx is making other insurers see dollar signs. As Dinah Wisenberg Brin reports in Cigna Comments Prompt Speculation On Drug-Benefits Unit Plans, Cigna's Chairman and Chief Executive H. Edward Hanway said:
"We obviously have new benchmark information now relative to not only what the value placed on the WellPoint PBM was, but also what some of the terms of that relationship were, what some of the capabilities agreed to between the two parties were, and we will use that as part of our benchmarking," Hanway said. "We will evaluate the PBM and we will ultimately do what's obviously in the best interest of our customer value proposition and hence our shareholders, so we are looking at that actively."
A few weeks ago, Cigna's then-CFO Mike Bell made a similar point:
"In light of WellPoint's recent announcement with Express Scripts, we are open to looking at strategic alternatives…The price tag of the WellPoint acquisition certainly got a lot of people's attention, certainly ourselves included." (per Reuters)
3) Marketplace Value of PBMs – The latest deals also provide a counterpoint to the "PBMs add no value" critics. The use of a PBM reflects many individual business decisions by payers and insurers. If PBMs really add "no value," then sophisticated payers and insurers would simply bypass them and perform the activities themselves. However, the Wellpoint Next Rx transaction with Express Scripts suggests that the opposite trend is occurring.
4) Lack of Concentration – Unlike other parts of the pharmacy supply chain, the PBM market is not yet an oligopoly as measured by the four-firm concentration ratio in the first quarter of 2009:
5) Need for Generic Scale – Generic drugs are a major source of profitability for retail and mail pharmacies. Buying power matters, especially given the volume of upcoming patent expirations. CVS Caremark (CVS) has become the single largest buyer of generic drugs in the United States and can use any cost advantage in the marketplace.