Wednesday, August 15, 2012

Express Scripts Disavows The Medco Legacy

Last week, Express Scripts detailed its post-merger plans for divesting legacy Medco assets. As I predicted over a year ago, many of Medco’s more ambitious diversification activities are on the chopping block, including United BioSource, Liberty Medical, and the European expansion.

All in all, it looks like a back-to-basics strategy for Express Scripts, which is busy cutting costs and leveraging its bargaining power against manufacturers, pharmacies, and wholesalers. Just ask AmerisourceBergen.

Below, I review these legacy businesses to provide some perspective on the divestitures. But if you ask Express Scripts execs about these moves, don’t be surprised if they act like an amnesiac super spy and reply: “Who was David Snow?”

Here’s the full text of Express Scripts Holding Company’s August 10, 2012, 8-K SEC filing:
“Earlier this week, Express Scripts Holding Company (the “Company”) disclosed that it was assessing strategic options for many of the businesses included in its Other Business Operations segment for ultimate disposition. In communications with its employees, the Company has provided additional details regarding which businesses may be divested. Specifically, the Company indicated that it currently intends to pursue divestiture of the diabetic testing supply and related businesses under its Liberty brand, as well as certain business units operated under the Company’s United BioSource Corporation (or UBC) subsidiary. The Company also announced its decision to dissolve the Company’s joint venture in China, wind down its business in Germany and France, and exit its European headquarters in Amsterdam.”

In August 2010, Medco acquired UBC in an all-cash transaction valued at around $730 million.

UBC’s corporate brochure highlights its diverse grab-bag of services, including: clinical research outsourcing; product development; access and adherence solutions; Risk Evaluation and Mitigation Strategies (REMS); comparative effectiveness research; and health economic studies.

The synergies were elusive from the outset. Manufacturer-oriented services, which are never a comfortable fit with the payer-oriented PBM business, have been run independently of the core business. In Is Medco Overreaching with United BioSource?, I questioned the acquisition by wondering if Medco’s management was “…succumbing to business model creep and management hubris.

Express Scripts will be selling “certain business units” of UBC, not the whole business. While they have not publicly disclosed what’s being sold, I expect that the clinical research outsourcing and product development businesses will go, along with the 30% of UBC’s revenues from international operations.

Express Scripts will probably retain U.S.-based access capabilities that fit with its HealthBridge specialty hub business—REMS, reimbursement support, payer marketing, and other related services. I do sometimes wonder about payer-focused PBMs providing these services to manufacturers, per my comments in Why ABC Grabbed Caremark’s Reimbursement Hub.


In June 2010, Medco made a big splash with its announcement of a joint venture to penetrate the European market. See Medco Expands in Europe, which includes an exclusive video showing the negotiations.

The logic is straightforward. Europe lags the U.S. in the use of modern pharmacy care techniques and tools despite being the second largest market behind North America. European health systems have focused on leveraging the state’s single-payer bargaining power to drive down the price of brand-name pharmaceuticals. This model is losing effectiveness as generics take over. In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes much more important than the unit price per pill.

Alas, the European pharmacy market is highly resistant to change. For example, in most EU countries, pharmacy chains are either prohibited or severely restricted. Pharmacy profit margins are usually regulated, weakening traditional benefit design incentives. (My independent pharmacy readers are now making travel plans...)

The European debt crisis has only hardened opposition to disruptive health care changes, so Express Scripts is wise to back off of this vision.

Express Scripts was very quiet about its 2009 Chinese investment, which I noted in PBMs Go Global for Growth. This business also looks to be a costly distraction.


In August 2007, Medco acquired Polymedica (with Liberty Medical) for about $1.5 billion. Liberty Medical sells diabetic supplies and products, including durable medical equipment (DME), covered primarily under a consumer’s medical benefit.

Margins in the DME business took a hit with the advent of competitive bidding, so the economics are much less attractive in this tough business. Nevertheless, there are many likely buyers for the business.

The two biggest players (ahead of #3 Liberty) both have intriguing histories:
  • CCS Medical is a private company that exited Chapter 11 bankruptcy in March 2010.
  • Edgepark Medical was purchased in 2010 by legendary private equity firm Clayton, Dubilier & Rice.
Keep an eye on McKesson (NYSE: MCK), which bought small competitor Sterling Medical  in 2006. McKesson has been so hands-off that its ownership is not even disclosed on Sterling’s website. Odd.


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1 comment:

  1. This seems logical. Medco was more entrepreneural & expansive; and more leveraged. Express scripts seems to be a 'just the basics' sweat shop. Also, if the economy in America/Europe remains mediocre - fewer people will be able to afford medication. RE: China - who buys medication in China? Does the government buy medication & then dole it out - according to need? Brave New World, huh?