Express Scripts plunges after losing top client in legal dispute

(Bloomberg) — Express Scripts Holding Co. shares fell in early trading after the company said it will 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 from drugmakers.

“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.”

expressscripts
Express Scripts headquarters is seen in St. Louis, Missouri Thursday, July 21, 2011. Express Scripts and Medco Health Solutions, the largest U.S. pharmacy benefits management companies, said they will combine in a deal worth $29.1 billion in cash and stock. Photographer: Whitney Curtis/Bloomberg News

Express Scripts shares were down 13% to $58.81 at 8:54 a.m. in New York, before the markets opened. Express Scripts 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” in 2019.

The Anthem contract represented 16% of the prescriptions Express Scripts processed last year, yet was responsible for 31% 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.

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. Express Scripts has scheduled a conference call for Tuesday morning.

‘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.”

In an interview with CNBC after the news was released Monday, CEO Wentworth said that his company will “be plenty big enough” without Anthem. Asked if he was worried other clients would also leave in the wake of the Anthem news, he said, “the Anthem deal is different from any of the other deals.”

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 immediately 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.

“We are always looking to grow,” CVS’s 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.”

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