We just published a new Tear Sheet and valuation for Pharmacy Benefits Management PBM giant Express Scripts (ESRX) to IOI Members. Here are the highlights.
The PBM business is an artifact of an opaque, Byzantine system of drug pricing in the U.S. and the relationships between drug manufacturers, PBMs and clients is phenomenally complex and interwoven. Express Scripts, the largest PBM and the last “pure-play” one, survives and has thrived in this tangled web of a business environment.
However, this tangled web is shifting and the shift increases the uncertainty surrounding Express Scripts’ valuation.
ACA (a.k.a. “National Romney Care”, a.k.a. “Obama Care”) is providing stress on insurers to find areas to cut costs and create efficiencies. Anthem’s (ANTM) recent suit against Express Scripts to break a 10-year contract is likely related to Anthem’s proposed (and perhaps doomed) merger with Cigna (CI). Cigna has its own in-house PBM and Anthem would benefit from negotiating power an in-house PBM would bring versus drug makers – a key consideration for insurers looking to cut operating costs.
In this complex industry, parts of which (especially drug pricing) are increasingly under regulatory scrutiny, we do not believe we have better insight into future demand for Express Script’s stand-alone PBM services and the profit the firm could derive than the market as a whole. In our opinion, operational risks to Express Scripts are to the downside, but a possible acquisition of the firm by Walgreens Boots Alliance (WBA) provides upside risk to bearish investors as well.
[Log In to IOI’s Research Portal to download the Tear Sheet]