Express Scripts Plunges After Losing Biggest Client Anthem

  • Anthem contract was 18 percent of 1Q sales, expires in 2019
  • Express Scripts earnings beat estimates; raises 2017 guidance

Express Scripts Holding Co. shares fell after saying it expects to lose its biggest customer, health insurer Anthem Inc., which will drop the pharmacy benefit manager after accusing it of overcharging by billions of dollars a year.

Anthem last year sued Express Scripts for about $15 billion, saying it was being overcharged by about $3 billion a year and that the pharmacy benefit manager wasn’t passing along discounts it gets on drugs.

“We do not have $3 billion in savings to give Anthem from pricing concessions,” Chief Executive Officer Tim Wentworth said on a call with investors Tuesday after the company said Anthem wouldn’t renew. “This is the point we’ve made since the figure was first stated by Anthem in January of 2016, at a time when we earned less than $2 billion on Anthem’s business the prior year.”

“We’re moving on. That’s the message you should get from today,” Wentworth said.

Express Scripts shares were down 12 percent to $58.83 at 12:38 p.m. in New York, after falling as much as 14 percent in the biggest intraday drop since August 2015. The company said Monday in a statement that it “was recently told by Anthem management that Anthem intends to move its business when the company’s current contract with Anthem expires” at the end of 2019.

The Anthem contract represented 16 percent of the prescriptions Express Scripts processed last year, yet was responsible for 31 percent of the company’s $7.26 billion in Ebitda, according to a company presentation Tuesday. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

That high margin is new, Wentworth said. At the beginning of the contract, “Anthem underperformed wickedly,” he said on the call.

With or Without You

Without Anthem, Express Scripts will cover about 65 million people and process about 1 billion prescriptions a year, the company said. It spent much of Tuesday’s conference call defending the company’s business and its future.

“Our solutions are in demand and our work has never been more important,” Wentworth said on the call. “With or without Anthem, we remain well-positioned for future growth and to lead the way to more affordable access to medicine.”

Asked about whether other clients might leave amid the Anthem turmoil, Wentworth said that the feedback Wentworth has gotten from other clients has been “extraordinarily supportive.”

In the suit, Anthem said Express Scripts “has deliberately delayed the repricing process for months” and “refused to negotiate, let alone in good faith, over Anthem’s pricing proposals.”

Bonnie Jacobs, a spokeswoman for Anthem, declined to comment.

‘Incremental Pain’

Now the topic of discussion turns to “how much incremental pain will be felt on deleveraging, how many other clients/customers will also flee,” Ross Muken, an analyst with Evercore ISI, said in a note to clients. “Post the bludgeoning, we think management will have to take a hard look at the company’s prospects through the roll-off and decide the path forward.”

Express Scripts also announced its first-quarter results on Monday. Earnings, excluding some items, were $1.33 a share, Express Scripts said in the statement. That beat the $1.32 average of analysts’ estimates compiled by Bloomberg.

It raised its 2017 adjusted earnings guidance to $6.90 to $7.04 a share, up from the $6.82 to $7.02 it projected last month.

New PBM?

Anthem, for its part, doesn’t have many outside options to turn to. After consolidation in the drug benefit industry, just a handful of other major PBMs remain: CVS Health Corp., which manages drug benefits for Anthem’s competitor Aetna Inc.; OptumRx, a unit of another Anthem rival, UnitedHealth Group Inc.; and Prime Therapeutics LLC, which manages drug benefits for nonprofit Blue Cross and Blue Shield plans in many states.

CVS Health, Prime Therapeutics, and UnitedHealth didn’t respond to emails sent late Monday asking whether they planned to bid for the Anthem business. Prime Therapeutics expressed interest in the business last year. CVS rose 2.5 percent to $82.04.

“We are always looking to grow,” CVS CEO Larry Merlo said in an interview last week, in response to a question about whether his company would be interested in the Anthem business. “There is nothing to prevent us from adding to our client list.”

— With assistance by Caroline Chen

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