Tuesday, September 25, 2018

The Cigna-Express Scripts Deal's Intriguing Connections With—And Implications For—AmerisourceBergen and Walgreens

Almost there! Last week, the U.S. Department of Justice (DOJ) Antitrust Division closed its investigation of Cigna’s proposed acquisition of Express Scripts. Click here to read the DOJ’s closing statement.

As with everything in the U.S. drug channel, there’s more to this transaction than meets the eye.

Below, I explain how the transaction will benefit AmerisourceBergen (ABC), which supplies the mail and specialty pharmacies of Express Scripts. But as you’ll see, Express Scripts has been relying less on ABC as a source of supply for its mail and specialty pharmacies.

Meanwhile, the new organization transaction will have few degrees of separation from Walgreens Boots Alliance (WBA). To add to the intrigue: WBA is both ABC’s largest customer and its largest shareholder. Below, I map how Cigna, Express Scripts, AmerisourceBergen, and Walgreens Boots Alliance connect with one another.

Drug channels are organizing and aligning themselves into multifaceted entities that cross traditional functional boundaries. Are you ready to compete, collaborate, and coexist with a complex arrangement that crosses many traditional boundaries?

THE DEAL

For background, see last week’s press release on the transaction: U.S. Department of Justice Grants Clearance to Cigna’s Acquisition of Express Scripts

I have provided perspectives on the Cigna-Express Scripts deal in these Drug Channels articles:
And I wonder if Cigna will have buyer’s remorse if we move to a world without rebates, a la The Drug Channels Negotiated Discounts Model.

AMERISOURCEBERGEN’S GAIN AND PAIN

The ABC-Express Scripts relationship dates from ABC’s agreement with Medco Health Solutions. In 2012, Medco Health Solutions was acquired by Express Scripts, which had been supplied by Cardinal Health. ABC won the combined business and began supplying Express Scripts on in late 2012. In 2017, ABC and Express Scripts announced a new, five-year agreement through September 2022.

We estimate that for ABC’s 2018 fiscal year, revenues from Express Scripts will be $22.7 billion. The profitability of the Express Scripts contract is low. For ABC’s 2018 fiscal year, Express Scripts therefore accounted for an estimated 14% of ABC’s revenues—but only 2.2% of ABC’s total corporate operating profit. See Exhibit 93 in our forthcoming 2018–19 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

The chart below quantifies the Express Scripts’ disclosures showing its decreasing reliance on ABC. In calendar year 2014, Express Scripts reported having made 70% of its pharmaceutical purchases through ABC. For calendar year 2017, Express Scripts reported that it had made only 54% of its pharmaceutical purchases through ABC.

[Click to Enlarge]

The revenue figures above are based on Express Scripts’ calendar year financial reporting. We therefore computed Express Scripts pharmacy revenues to correspond to ABC’s fiscal year.

From ABC’s 2014 to its 2017 fiscal years, its sales to Express Scripts grew by only $0.1 billion (+0%). Meanwhile, over the same three-year fiscal period, revenues at Express Scripts’ mail and specialty pharmacies grew by $6.3 billion (+17%). What’s more, ABC’s sales to Express Scripts declined during ABC’s 2017 fiscal year. Ouch.

The Cigna deal will likely provide a small incremental upside for ABC and a corresponding downside for McKesson:
  • Cigna is among McKesson’s largest 15 customers. I expect that once the Cigna-Express Scripts transaction is completed, the companies’ combined volume will consolidate with a single wholesaler.
THE WALGREENS CONNECTION

Walgreens Boots Alliance (WBA) will also play a role in this story.

There are two noteworthy connections between WBA and Express Scripts:
  • Econdisc—As we discuss in Meet The Power Buyers Driving Generic Drug Deflation, Express Scripts sources generic drugs via its Econdisc Contracting Solutions group purchasing organization. Express Scripts is now partnering with Walgreens Boots Alliance Development (WBAD) to purchase generic drugs. Express Scripts is participating via its Innovative Product Alignment (IPA) subsidiary.
  • ValoremRx.—In 2018, Walgreens and Express Scripts formed ValoremRx Specialty Solutions, a separate group purchasing organization focused on the procurement of specialty brand drugs.
Meanwhile, Walgreens has an opportunity to expand its Medicare Part D partnerships with a combined Cigna-Express Scripts organization:
  • For 2018, Walgreens is the largest preferred drugstore chain in two of the three Express Scripts Part D plans. CVS is the primary drugstore chain for the third Express Scripts plan. Going forward, I presume that all three plans will be with Walgreens.
Walgreens is also tightly connected to AmerisourceBergen. It accounts for more than one-third of ABC’s revenues, it owns 26% of ABC’s outstanding common stock, and controls one director on ABC’s board.

DEGREES OF SEPARATION

Here’s our first pass at mapping the major connections among Cigna, Express Scripts, AmerisourceBergen, and Walgreens Boots Alliance. Let’s call it CESAW (pronounced “seesaw”).

[Click to Enlarge]

Understanding CESAW's complex web is crucial for manufacturers’ payer, channel, and organizational strategies—and perhaps even more fun than playing Six Degrees of Stefano Pessina.

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