I’ve long been skeptical of Rite Aid’s PBM strategy. As you will see below, last quarter’s results further validated my skepticism. Synergies with the company’s retail pharmacy business are minimal—and shrinking.
Rite Aid’s management team does seem committed to fixing and then growing the business. But as I see it, the company should either unload Elixir before it loses even more value or join with a larger company that can offer a viable platform for success.
I’m sure many investors wish that Amazon would simply buy Rite Aid and solve their pain.
On the other hand, free advice is often worth what you paid for it. Read on and see what you think the company should do.
As always, I encourage you to read the original source material for yourself. Here are links to Rite Aid’s financial results for the first quarter of its 2022 fiscal year, which ended on May 29, 2021:
HOW WE GOT HERE
In 2015, Rite Aid acquired the privately held EnvisionRx, which includes two small PBMs and some related pharmacy services businesses. The PBM business is now known as Elixir. It operates a specialty pharmacy (Elixir Specialty) and a mail pharmacy (Elixir Mail).
I was initially positive about the transaction. In February 2015, I speculated that Rite Aid was attempting to build a mini-CVS Health. See Rite Aid-EnvisionRx: Initial Thoughts on the Deal.
However, Rite Aid’s troubled history of PBM ownership continues to recur.
In our 2018 post Does Rite Aid Have the Grit to Succeed With Its EnvisionRx PBM Business?, I updated my analysis of Rite Aid’s PBM strategy with the help of the Philadelphia Flyers’ beloved mascot, Gritty. I wrote:
“[T]here 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…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.”
The most recent financial results reveal that the situation has deteriorated even further than I had expected.
Rite Aid’s PBM acquisition was intended to help both businesses grow. However, Elixir contributes little to Rite Aid’s pharmacy business.
An impartial measure of internal corporate synergy comes from Rite Aid’s reported intersegment eliminations. These amounts measure revenues whenever an Elixir beneficiary fills a prescription at a Rite Aid pharmacy. Both the PBM (Pharmacy Services segment) and the pharmacy (Retail Pharmacy segment) record the revenue from such a prescription. If synergies between Rite Aid’s PBM and pharmacy businesses were growing, we’d expect the reported Intersegment eliminations to grow.
The chart below shows the total value of intersegment revenues as a percentage of Rite Aid’s Retail Pharmacy segment’s prescription revenues. The numbers tell a story of very weak synergies. The Elixir PBM business accounted for only 2.1% of Rite Aid’s prescription business. That’s simply too low to be meaningful.
[Click to Enlarge]
What’s more, Elixir’s weaker performance in Medicare Part D and the loss of a large commercial client has triggered a decline over the past year. Enrollment in the company’s Elixir stand-alone plans dropped by 6% for 2021. (See Supermarkets Outpace CVS and Walgreens in 2021’s Part D Pharmacy Networks.)
Oddly, Rite Aid’s Part D strategy does not even attempt to leverage any theoretical advantages. For 2021, Rite Aid participates as a preferred pharmacy in the Part D plans sponsored by Elixir, plus only one other plan that is sponsored by an external company. However, Elixir’s plans designate multiple other chains as preferred pharmacies, including CVS, Walmart, Kroger, Albertsons, and Publix. (See Battle of the Giants: CVS, Kroger, Walgreens, and Walmart Expand in 2021 Part D Preferred Networks.)
So much for synergy and growth.
THE TRIUMPH OF HOPE
On last month’s earnings call, Rite Aid CEO Heyward Donigan tried to put a positive spin on the outlook:
“We believe that Elixir provides a valuable offering to our target clients of regional health plans and mid-market employers. We will compete and win in these markets by leveraging the integrated offering of Elixir, Rite Aid and Health Dialog to provide clinical capabilities that will enable our clients to reduce their overall healthcare costs and improve health outcomes for their members to help them thrive.Notably, she dismissed the idea that Elixir lacks the size and scale to compete in the highly consolidated PBM market while highlighting numerous activities underway to improve the business.
In order to maximize the benefits of our integrated offering, we will make investments in Elixir, including expanding our sales and underwriting teams, moving to a common operational and technology platform to drive efficiencies and improve member experience, and maximizing rebate value in order to provide better value to our clients.”
I remain skeptical of the company’s ability to build a large, sustainable PBM player. There are many other smaller, well-managed PBMs now operate the market. Some of these private companies have garnered significant private equity investment to fund their growth and expansion. Meanwhile, the prospects for meaningful PBM-retail synergies within Rite Aid remain remote.
NOT THAT YOU ASKED…
So, Rite Aid is not ready to abandon its PBM business. What should it do?
CEO Donigan offered the following intriguing hint about the PBM’s strategy:
“We are revisiting our rebate aggregators, we do have our own paper and so we do our own rebates, but we are looking at opportunities to become more competitive in that regard.”Hmm. Perhaps Rite Aid should follow other smaller PBMs and join with its larger rival?
One logical option would be the rival businesses in Cigna's Evernorth segment—especially Express Scripts, Ascent Health Services, and InsideRx. They are already providing rebate negotiation, network management, and/or a sourcing platform for Prime Therapeutics, Kroger, Humana, GoodRx, and Amazon. See my analysis in How Cigna’s Growing Pharmacy Platform Expands Its Channel Power.
I could be totally off-base. But as I remind prospective consulting clients: Free advice costs nothing until you act on it.