Fitch Ratings: Anthem v. Express Scripts suit could shake up PBM industry
NEW YORK - The outcome of a dispute between Anthem and Express Scripts, underscored by a lawsuit announced Monday, could have far-reaching effects on the evolving pharmacy benefits management industry and implications for Express Scripts' independent business model, Fitch Ratings reported Tuesday.
Anthem is claiming that the PBM Express Scripts charged Anthem with higher than competitive benchmark pricing on pharmaceutical products. The lawsuit challenges a fundamental aspect of PBM-insurer relationships: the value of a PBM's negotiating power with pharmaceutical manufacturers.
Fitch would partially attribute an outcome that ends on terms more favorable for Anthem to the company's significant scale, which will expand further upon completion of its planned acquisition of Cigna. Anthem is Express Scripts' largest client. Such a resolution may also indicate a lower implicit value for the power of a PBM's negotiating scale, especially relative to the scale of the planned combination of Anthem and Cigna. Depending on the details, it could also be perceived on the part of Express Scripts that it was not passing enough of its cost savings through to its largest customer, which could embolden other clients to seek the same.
While taking its PBM operations in-house could simply reflect a shift in Anthem's own strategy, switching to another PBM could call into question Express Scripts' claims that its independent business model is best positioned to pass through cost savings to clients. Express Scripts management has asserted that its primary competitors, due to their lack of independence, have allegiances other than to their clients: Caremark to pharmacy chain CVS Health and OptumRx to health insurer UnitedHealth Group.
With respect to its 'BBB' ratings, Express Scripts maintains adequate flexibility amid this high-profile pricing dispute. Solid free cash flow ($2 billion expected in 2016) is sufficient to repay debt in the event of a negative development pertaining to its Anthem contract, Fitch reported. Anthem accounted for 16.3% of Express Scripts' total 2015 sales, or roughly $16.6 billion, Fitch added.
"However, we assume these sales carry lower margins on average than Express Scripts' overall book of business, meaning a relatively smaller potential impact to EBITDA and FCF," Fitch stated. "Given the importance of PBM services to health insurers, Fitch expects Anthem to resolve its issues with Express Scripts or to find a competitive alternative. We believe the lawsuit's announcement is not a near-term credit issue from Anthem's perspective."
Drug developers drive demand for their drug portfolios by negotiating with third-party payers, or with PBMs as their agents, by seeking favorable placement on drug formularies. Payers/PBMs use the formulary, which essentially separates medicines into a hierarchy based on costs versus benefits, as the primary mode of controlling prescription drug expenses. Fitch estimates that roughly 83% of all pharmaceuticals in the U.S. are purchased by commercial and government third-party payers, with the remainder being paid for by patients out-of-pocket.
The fewer competitors an innovative drug has, whether it is a directly substitutable generic or an innovative/generic therapeutic alternative, the stronger the innovative drug maker's pricing power with commercial third-party payers/PBMs.