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February 18, 2016 at 07:00 AM
(Bloomberg) — The high road has its uses beyond creating a warm cocoon of smugness.
On a call with analysts Wednesday discussing its fourth quarter earnings, pharmacy benefit manager Express Scripts (Nasdaq:ESRX) declined to offer much in the way of details about its contentious price negotiations with health insurer Anthem (NYSE:ANTM), its biggest client, citing a policy of keeping such discussions private. In doing so, the company managed both to keep its cards close to its chest and sneak in some jabs at Anthem’s choice to take things public.
Anthem claims Express Scripts owes it $3 billion a year in extra prescription drug savings under a 10-year contract that runs through 2019. Express Scripts begs to differ. “I have no clue where the $3 billion came from. I have no concept; the number doesn’t make any sense to me,” CEO George Paz said on the call.
See also: Anthem not entitled to $3 billion, Express Scripts says of talks
The possibility that Express Scripts could either lose Anthem as a customer or be forced to slash prices has driven its shares down 20 percent since negotiations became public. Such uncertainty will likely weigh on the stock for a while, as both companies are holding their ground. But there’s still plenty of upside for investors in Express Scripts.
PBMs lower drug costs — and pad their profits — by pushing patients into generics and by negotiating with drugmakers for lower prices on expensive branded drugs. More than 84 percent of prescriptions filled by Express Scripts in the fourth quarter were generic, up from less than 75 percent in 2011.
Prescriptions keep getting more profitable for Express Scripts. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) per claim hit $5.66 in the fourth quarter, up 2.7 percent from the same period in 2014 and up more than $1 from 2013. That reflects both higher generic usage and the company’s skill at squeezing discounts from drugmakers, through aggressive negotiations and the use of its formulary, or preferred-drugs list.
The best example of this is Express Scripts’ deal to cover an AbbVie hepatitis C (HCV) drug and exclude Gilead’s competing, more-expensive HCV drugs. This arrangement has saved clients more than $1 billion dollars, Express Scripts claims. Those prescriptions were all routed through Express Scripts’ growing specialty pharmacy, Accredo, making it extra money.
The company plans a similar approach to a pricey new generation of cholesterol drugs and is working to tie cancer drug prices more closely to how well they work in different types of disease.
One thing that makes Express Scripts so effective in negotiations is its size. Acquiring Medco in 2012 helped turn it into the biggest PBM in the U.S. It processed 1.29 billion adjusted claims last year, compared to 751 million four years ago. Serving more patients means it can extract bigger discounts, which in turn attracts more clients. Losing Anthem, which makes up an estimated 14 percent of Express Scripts’ revenue (though less of its profit), would be a blow in 2019. But the company would still likely manage more than a billion claims a year, leaving it plenty big enough to warrant preferential treatment from drugmakers.
