Thursday, April 30, 2015

Express Scripts Talks About Its Pure-Play PBM Strategy, Deals Not Done, and Walgreens

Yesterday, Express Scripts held its latest quarterly call. (See links below for materials.) Along with the usual corporate yada yada yada, the call provided intriguing insights about Express Scripts' strategy and the PBM business model.

Express Scripts addressed its stand-alone PBM model (apparently awesome), likelihood of acquiring a retail chain (nil), recent evaluation of a “strategic transaction” (Catamaran?), and relationship with Walgreens (surprisingly positive).

Below, I provide highlights of the call along with my commentary. It’s sponge-worthy reading for anyone interested in the future of PBMs and the pharmacy industry.

THESE PRETZELS ARE MAKING ME THIRSTY

As always, I encourage you to read the original source material for yourself. Here are direct links to the Express Scripts materials for first quarter of 2015:
NO RETAIL FOR YOU

Chairman and CEO George Paz started off the call with a full-throated defense of the stand-alone PBM model—along with not-so-subtle digs at rivals CVS Health and Rite Aid.
”Our standalone model works. While our competitors within the PBM marketplace face inherent complex of interest due to their association with other players within the healthcare services industry, Express Scripts remains completely aligned with our clients' needs. When we see a member, we see a patient, not a retail customer.”
Well, no one can accuse Paz of being a low talker. He went further in response to a question from Lisa Gill of JP Morgan, saying:
”I do think that there is value to a retailer owning a PBM and that you can try to push people into your stores. That's not – our clients aren't really coming to us saying I want to go to Walgreens or want to go to Rite Aid or CVS or any other grocery stores…
We can partner with CVS, we can partner with Walgreens, we can partner with Rite Aid, we can partner with the big box stores, we can do what it takes to meet our clients' geographic needs and at the same time meet their economic needs. And I think we're uniquely positioned to do that.”
I don’t hear any ambiguity in his comments. Under current management, Express Scripts will not be acquiring a drugstore chain. So, we can all stop speculating about a Rite Aid transaction.

As I note in OptumRx Sails Away with Catamaran: Deal Analysis and Industry Implications, the Big 3 PBMs are increasingly differentiated. Express Scripts is the largest pure-play PBM. OptumRx emphasizes medical-pharmacy benefit integration, while CVS Health can claim greater channel-pharmacy benefit integration. Meanwhile, Rite Aid is busy acquiring PBM capabilities with its EnvisionRx deal.

A MYSTERY WRAPPED IN A TWINKIE

In the first quarter, Express Scripts did not buyback any stock. This non-move surprised Wall Street.

Stock buybacks are a tax-efficient way of returning cash to shareholders. Dividends are taxable, but there is no tax due on a share buyback unless investors sell their shares. By reducing the number of outstanding shares, buybacks also increase a company’s Earnings per Share (EPS) growth. They can also benefit corporate executives whose compensation is tied to EPS and share-price targets. Not that there's anything wrong with that.

Why no buybacks?

Interim CFO Jim Havel gave this tantalizing hint:
”As a result of exploring strategic transactions, we did not repurchase shares in the first quarter.”
Hmmm.

My guess: Express Scripts was one of Catamaran’s possible suitors. Put another way, Catamaran was the one that got away. (One last nautical metaphor!)

Express Scripts committed to a big accelerated share repurchase (ASR) program. This move could limit the company’s option for a major acquisition in 2016, but management says it can still double dip if necessary.

HELLO ... WALGREENS

While Express Scripts ruled out a big acquisition, it could consider a strategic partnership or joint venture.

Check out these surprisingly positive comments about Walgreens from Paz:
” But just from my perspective, the Smart90 is a very important offering for us because it does give us a 90-day option at retail. I think from a client perspective, some of them are very very – want access and they want to be able to meet the other offerings in the marketplace. Other clients don't really care, but I do think that to the extent that Walgreens has stepped up and has been a good partner with us on the Smart90, we've got some very satisfied clients. We continually work with them to try to make sure that we could advance that ball forward and we're happy with the relationship.”
Sounds to me like Walgreens new management team is successfully charming payers. For background on Walgreens' strategy, see my comments under “Walgreens will emphasize the importance of payer relationships” in Walgreens Boots Alliance: Analysis of its New U.S. Pharmacy Strategy.

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Sometimes the road less traveled is less traveled for a reason. Will Express Scripts end up as the master of its domain?

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