Wednesday, October 03, 2018

Does Rite Aid Have the Grit to Succeed With Its EnvisionRx PBM Business?

Let’s check in with poor ol’ Rite Aid, the little drugstore that couldn’t.

Over the past year and half, Rite Aid has sold off 2,000 stores to Walgreens Boots Alliance, scuttled a proposed merger with Albertsons, and watched its stock price drop from nearly $9 to about $1. Yikes.

Rite Aid’s EnvisionRx business, which includes two small PBMs and some related pharmacy services businesses, still has some value. But as you will see below, there appear to be few synergies between Rite Aid’s pharmacy business and the Envision PBMs. Investors are grumbling that Rite Aid should sell EnvisionRx before things get any worse.

Rite Aid is again trying to prove that hope will triumph over experience. I suspect that the industry’s dynamics will hip check the company onto the ice.

ZAMBONI TIME

As always, I encourage you to read the original source material for yourself. Here are links to Rite Aid’s financial results for the second quarter of its 2019 fiscal year, which ended on September 1, 2018:
HAT TRICK

In 2015, Rite Aid acquired EnvisionRx. At the time, I speculated that Rite Aid was attempting to build a mini-CVS Health. See Rite Aid-EnvisionRx: Initial Thoughts on the Deal.

Rite Aid reports the financials of this business as its Pharmacy Services Segment. The segment includes:
  • EnvisionRx and MedTrak (transparent and traditional PBMs)
  • EnvisionPharmacies (mail and specialty pharmacies)
  • Design Rx (cash pay infertility discount drug program)
  • Laker Software (claims adjudication software platform)
  • EnvisionRxPlus (Medicare Part D prescription drug plan)
On the earnings call, Rite Aid CEO John Standley explained why management values the EnvisionRx businesses:
“One is, it does make us a little less dependent on the retail drug business. It diversifies the business a little bit. Second thing is, yes, particularly in the Medicare Part D space, it gives us access to a preferred plan that we’re in. And that’s important to us. And that has allowed us to drive some script count to our stores.

But realistically, Envision is not as big as big 3, right? It is subscale to those other assets. So, it has some synergistic value to it and drives some script count into our stores, and we’ve made some progress there.”
PENALTY BOX

It’s now more than three years since Rite Aid completed its acquisition of EnvisionRx. The business is showing some minor signs of growth, but little synergy with the core pharmacy business.

The chart below updates our analysis of EnvisionRx’s quarterly PBM revenues. Rite Aid completed its acquisition of EnvisionRx on June 24, 2015, so our data starts with the first full quarter after Rite Aid’s ownership began.

As you can see, EnvisionRx’s revenues have increased in the past two quarters compared with the previous year’s figures. This growth followed a disastrous 2017, partly because EnvisionRx participated in fewer Medicare Part D regions.

For 2018, EnvisionRx expects that its Part D membership will grow by 50%, ending the year with more than 600,000 members. That is impressive growth, but it would give EnvisionRx only a mere 1.3% of total enrollment in stand-alone Part D plans.

[Click to Enlarge]

Despite this growth, EnvisionRx is still contributing little to Rite Aid’s growth.

An impartial measure of internal corporate synergy comes from Rite Aid’s reported intersegment eliminations. These amounts measure revenues whenever an EnvisionRx beneficiary fills a prescription at a Rite Aid pharmacy. Both the PBM and the pharmacy record the revenue from such a prescription. If synergies between Rite Aid’s PBM and pharmacy businesses were growing, then we’d expect reported Intersegment Eliminations to grow.

The chart below shows the total value of intersegment revenues as a percentage of Rite Aid’s prescription revenues. The figures starting with the 3/4/17 quarter reflect Rite Aid’s smaller, post-divestiture business.

[Click to Enlarge]

Consistent with our previous analysis, the numbers tell a story of very weak synergies. The EnvisionRx PBMs accounted for a mere 2% of Rite Aid’s prescription business. That’s simply too low to be meaningful. The situation has barely improved since my review last year.

For comparison, we estimate that in 2017, Caremark’s PBM pharmacy network claims accounted for about 40% of CVS retail and long-term care pharmacies’ revenues.

CRASHING THE NET?

Retail pharmacies are facing multiple challenges, including slow prescription growth, a plateau in the generic dispensing rate, payers’ use of narrow networks, direct and indirect remuneration (DIR) fees, and intense competition for consumers. Pharmacy industry revenues are shifting from traditional brand-name drugs to specialty drugs.

Here in Philly, we are celebrating Gritty, the cute (?) and lovable new mascot of the Philadelphia Flyers. Rite Aid can probably skate along for a little while. But unlike our city’s newest hero, the company seems unlikely to have the grit for long term survival.

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