PBM Pressure: Politics, Prospects and Pass-Throughs
Cigna & Express Scripts Follow Aetna & Caremark Lead for Fighting Chance
It is no secret that PBMs have come to dominate the pharmaceutical supply chain, wresting power away from the Big 3, retail pharmacy, specialty and insurance companies, chronologically. However, it looks like PBMs are running out of steam as their rebates come under fire, acquisition targets run dry and they face an administration that is not on their side.
Motivation 1: Losing the Political Game
It is not foreseeable that President Trump’s rhetoric targeting drug pricing will be impactful in any meaningful way. His recent top pick to lead the US Health and Human Services is Alex Azar, the former “top lobbyist” and later President of Lilly USA. The HHS oversees the FDA, NIH, and CMS among other offices and agencies. This is an objective win for Big Pharma as the FDA oversees the pharmaceutical industry while the NIH and CMS pay for research and reimbursement, respectively, out of the federal budget.
With increasing political support for Big Pharma, the tide might be turning for the archrivals: PBMs. The moves taken by all three major PBMs, OptumRx, ExpressScripts and Caremark signal more of defense, rather than offense.
Motivation 2: No More Runway to Grow
Simply, PBMs might see the acquisition landscape as it is – barren with limited potential for growth that will appease stockholders. Major acquisitions over the past five years have almost completely consolidated the industry. Acquisitions not only push stock prices up, but incorporation with bigger companies means more negotiating power against the rest of the vertical. Case and point: Walgreens squared off with Express Scripts in July 2011. After one year, $4 billion dollars in lost revenue, and a 30% reduction in stock price ($44.07 July 2011 to $30.58 July 2012), Walgreens swallowed its pride and executed an agreement with ExpressScripts. Shares of Walgreens rose 11.8% on the same day. Currently, horizontal mergers are being blocked (e.g. Aetna & Humana) so companies are looking at the vertical.
Motivation 3: Rebate Transparency and Pass-Throughs
The Trump Administration wants to specifically pass along to beneficiaries the rebates that PBMs are able to secure from drug manufacturers through back-door negotiations. Those negotiations and their secrecy are the lifeblood of the currently lucrative PBM business model; if there is any light shed on those negotiations or they are threatened in any way, it would be a quick and brutal race to the bottom. PBMs use a number of tactics to secure rebates, specifically through establishing strict formularies and setting reimbursement rates.
Each of the three major PBM’s has made significant strategic moves with two in the past 6 months leading the PBM to (potentially) be owned by an insurance company.
In a recent speech, a representative claimed that “OptumRx is the largest non-governmental provider of healthcare services” with $91 billion in revenue. That being said, OptumRx still finds it beneficial to remove the current OptumRx CEO, who lead substantial growth over the past 4 years with a former Big Pharma executive with GlaxoSmithKline. This is a clear indicator of a change in strategy: either OptumRx’s buy-and-grow strategy has run out of runway or the future of the PBM space is rapidly declining due to the reigning political party (either due to transparency threats and/or Big Pharma as HHS Secretary). While the appointment of a former Big Pharma exec as the new CEO leads one to believe that the move was in response to politics, the shift in the role of the former CEO to the expanded $600 million Optum Ventures fund suggests it might be lack of deal supply.
ExpressScripts lost Aetna as a customer with the CVS Caremark & Aetna deal. Seeing the walls closing in, Express Scripts jumped into the arms of Cigna for safety. The insurance-PBM vertical is now a cemented model, with UnitedHealth/Optum Rx leading the way.
See why we think the CVS/Aetna deal is different than any other, here
As PBMs, specialty pharmacies, wholesalers, and retail pharmacies become firmly cemented, the final lucrative play in healthcare is likely going to be Benefits Administration. It is the last sector of the healthcare to lack significant consolidation; and, it is where three brand-name companies (Amazon, JP Morgan Chase, & Berkshire Hathaway) are making a huge play via joint venture. Read more on that here
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