Express Scripts Plunges as Biggest Client Threatens to Leave

  • Most pharmaceutical savings will go to clients, CEO says
  • Stock drops 6.9 percent in biggest decline since 2012

Express Scripts Holding Co.sank in early trading Wednesday after health insurer Anthem Inc., its biggest client, threatened to ditch it for a competitor unless the pharmacy benefit manager can deliver $3 billion a year more in savings on drug costs.

Losing Anthem would depose Express Scripts as the U.S.’s biggest manager of prescription drug benefits, and the threat sent the stock down 6.9 percent to $79.69 at the close in New York. It was the biggest one-day drop since November 2012.

Taking a contract dispute between the two companies public, Anthem Chief Executive Officer Joseph Swedish said Tuesday that Express Scripts should be passing along more of the savings it negotiates from drugmakers. If it doesn’t, the health insurer may look for another pharmacy partner. Express Scripts disputed Swedish’s description of the terms between the two companies, and the $3 billion figure.

“We are entitled to improved pharmaceutical pricing that equates to an annual value capture of more than $3 billion,” Swedish told investors Tuesday at the J.P. Morgan Healthcare Conference. “To be clear, this is the amount by which we would be overpaying for pharmaceuticals on an annual basis.” Much of those savings would be passed on to clients, he said.

Anthem and Express Scripts have an unusual arrangement that stems from Anthem’s sale of its pharmacy-benefits business to Express Scripts in 2009. The insurer is entitled to periodic reviews of how much it pays for drugs, a process the companies last went through in 2012. They haven’t yet reached a deal on the most recent talks.

‘In Good Faith’

Express Scripts said that Anthem was mischaracterizing the situation.

“Express Scripts has consistently acted in good faith and is in full compliance with the terms of its agreement,” said Brian Henry, a spokesman for the company. “While the contract calls for good faith negotiations regarding a pricing review, it does not mandate specific price adjustments. Furthermore, Anthem is not entitled to $3 billion.”

The two may be running out of time. “We have a very involved dispute resolution process in the contract that has been fully exhausted,” Thomas Zielinski, Anthem’s general counsel, said Tuesday after the investor presentation. “That said, we remain in dialogue.”

Zielinski said Anthem took the dispute public because the company wasn’t getting the savings it needed to offer more competitive products, such as Medicare drug plans. 

Unrealistic?

Anthem’s $3 billion savings estimate appears unrealistic, given the overall size of its relationship with Express Scripts, said Garen Sarafian, an analyst at Citigroup Inc. Anthem accounted for about 14 percent of Express Scripts’ $100.9 billion in revenue in 2014. Still, he said investors will be nervous until the outcome of the dispute is clearer.

Pharmacy benefit managers, led by Express Scripts, have helped force much of the current debate around drug prices in the U.S. They’ve succeeded in wringing steep discounts on expensive therapies such as Hepatitis C treatments by excluding some drugs unless their makers offer better prices.

The benefit to Anthem could ultimately be at least $600 million, partly because the savings would result in lower rates that would help the insurer attract and keep customers. Yet, Anthem, if it does drop the company, doesn’t have many options to turn to. Consolidation in the industry has led to just a handful of other major players: CVS Health Corp., OptumRx, a unit of Anthem’s competitor UnitedHealth Group Inc., and Prime Therapeutics LLC.

Still Talking

Express Scripts said Monday that the companies are still talking. “I can’t think of a time, with any client, where we’ve had a contractually defined price review where we’ve reached a point where we couldn’t ultimately settle it out,” Tim Wentworth, Express Scripts’ president, said at the conference Monday, before Anthem’s remarks.

"Both of us have to step back and see whether we’re honoring the contractual terms of the agreement," Zielinski said. If not, “you have your legal remedies.”

They need to agree on what Zielinski called competitive benchmark pricing. If Express Scripts, the U.S.’s biggest pharmacy benefit manager, doesn’t come back to the insurer with what he called a “good-faith counter,” the insurer may look for another pharmacy benefit manager that can give it better prices.

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