ItsAValueTrap Posted July 25, 2013 Share Posted July 25, 2013 VIC writeup (not mine): http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/100106 Some quick notes on ESRX: 1- The healthcare industry always looks extremely unethical to me. The healthcare companies that do well tend to put profits ahead of people's lives. 2- ESRX has amortization costs related to its acquisitions. This distorts their GAAP earnings and makes them lower than what they should be. You should add back amortization charges related to acquisitions. Buffett explains the accounting details in one of his old Berkshire letters. 3- Scale is an advantage in this industry. Post merger, ESRX is definitely the #1 player in size. However, I don't consider the scale to be a full-blown moat as ESRX sometimes loses contracts to other companies. Link to comment Share on other sites More sharing options...
Cunninghamew Posted July 25, 2013 Share Posted July 25, 2013 VIC writeup (not mine): http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/100106 Some quick notes on ESRX: 1- The healthcare industry always looks extremely unethical to me. The healthcare companies that do well tend to put profits ahead of people's lives. 2- ESRX has amortization costs related to its acquisitions. This distorts their GAAP earnings and makes them lower than what they should be. You should add back amortization charges related to acquisitions. Buffett explains the accounting details in one of his old Berkshire letters. 3- Scale is an advantage in this industry. Post merger, ESRX is definitely the #1 player in size. However, I don't consider the scale to be a full-blown moat as ESRX sometimes loses contracts to other companies. The guys who posts under Tdylan409 is extremely intelligent. I actively monitor the stuff he posts. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted August 2, 2013 Author Share Posted August 2, 2013 I've written up my thoughts here: http://glennchan.wordpress.com/2013/08/01/pharmacy-benefit-managers-express-scripts-esrx/ I think that this is a management-driven business. George Paz has been compounding book value, free cash flow, and EPS at a very high rate since 2005. Link to comment Share on other sites More sharing options...
Cunninghamew Posted April 30, 2014 Share Posted April 30, 2014 This is starting to look pretty interesting. Stock missed on the quarter and cut guidance (also some other stuff) The cut in guidance appears to be caused by delays in the Medco integration, but nothing that gives me pause They are guiding for adjusted EPS of $4.82 to 4.94... I believe the adjusted number simply adds back amortization expense, but I have closed the file and am too lazy to reopen and read the footnotes. CFO guidance of $4,550 to $5,150 Link to comment Share on other sites More sharing options...
fisch777 Posted April 30, 2014 Share Posted April 30, 2014 FCF yield looks pretty attractive going forward and they seem committed to shrinking share count. Perhaps missed in the noise was the fact that despite script volume weakness and uncertainty, EBITDA per adjusted claim guidance for FY14 has risen to $5.20-5.30 due to better gross margins and expense controls. This up from low-to-mid $4s this time last year, and was already significantly better than everyone else in the industry. Volumes will be continue to be noisy around Obamacare, but ESI is clearly demonstrating the power of scale here and this should serve them well over the longer term. Link to comment Share on other sites More sharing options...
no_free_lunch Posted June 18, 2014 Share Posted June 18, 2014 George Paz, CEO and chairman of Express Scripts, sold a total of 681,508 shares of Express Scripts stock on June 13. .. The shares sold were about 26 percent of Paz’s holdings in the company, according to the filing. http://www.bizjournals.com/stlouis/blog/health-care/2014/06/paz-sells-49-million-of-express-scripts-stock.html Pretty major sale by the CEO. They didn't have it in the article above but another one quoted him as saying the sale was part of a diversification effort. It certainly isn't a conclusive red flag but it does make me cautious. Stock is down about 3%, presumably on the sale news (this just broke yesterday). Otherwise the company is cheap at about 11x FCF. Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted June 18, 2014 Author Share Posted June 18, 2014 I sold out of ESRX. It seems like the industry is undergoing some awful headwinds from Obamacare and more generics. I don't like what ESRX did on its latest earnings. One-time "acquisition expenses" went up dramatically to paper over poor operating performance at the business. In my experience, it's a bad sign when management starts bull****ing investors. Link to comment Share on other sites More sharing options...
Phaceliacapital Posted July 28, 2014 Share Posted July 28, 2014 One advantage that has been written up multiple times is ESRX's scale (around 33% of the market). The typical scale advantage is of course spreading the fixed costs of the business (SGA/marketing/R&D (less applicable I assume)) over more sales, allowing for higher margins etc.. Looking from the other side however, and given they're the third party in an otherwise direct relationship (between employer & pharmacy), isn't scale also a huge advantage in terms of bargaining power vis à vis the pharmacies? It seems that with 33% of the market you can definitely bring enough volume to the table to get your discount. The reason I am making the argument of bargaining power is because I don't fully understand your concern regarding generics. If I am ESRX, wouldn't I be happy when facing more generics? It seems to me that ESRX bargaining's power is reinforced when exposed to more generics? If I could choose between 2 scenarios for the same medicine: Scenario 1: Medicine is generic and provided by pharmacy A, B and C Scenario 2: Medicine is not generic and only provided by pharmacy D Isn't scenario 1 the most favorable for me as a negotiator? As in, listen here pharmacy A, give me 5% discount or I'll go to B or C or ... . On your headwinds from Obamacare, I am not an American and am less familiar with the details, could you shed some extra light on your concerns? In rough thinking I would think increased number of insureds is a positive for PBMs, not a negative? The main goal is more insured people at a lower cost, given that PBM's main goal of existence is to provide lower costs to insured people, aren't both positive drivers for its business? Or am I looking at it too simple? I have to look into the acquisition expenses so no comment there (yet). Thanks for your input! Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted July 28, 2014 Author Share Posted July 28, 2014 1- The insurance companies are a little more sophisticated than smaller customers. Some of the insurance companies have their own PBMs. Because they're more sophisticated, the margins are presumably lower. 2- Generics are kind of a bad thing. When you don't have generics, the market environment is more complex. The complexity helps the drug manufacturers and the PBMs make money. Because of the price gouging that happens, there is more room for PBMs to create value by helping their customers not get gouged (or the PBMs can make money by gouging them). 3- Clearly, my understanding of this industry was weak. So I'm going to stay away. Link to comment Share on other sites More sharing options...
Phaceliacapital Posted July 29, 2014 Share Posted July 29, 2014 So I guess the question is whether insurance companies with own PBMs can negotiate a price that is lower than the total of 1. the price they would pay with an external PBM and 2. the margin they need to pay to the PBM. Industry market share (from CVS 2013 pres): http://media.corporate-ir.net/media_files/irol/99/99533/dec2012/CVS_Caremark_2012_Analyst_Day-Per_Lofberg_Presentation.pdf ESRX - 34% CVS - 26% Optum - 12% Catamaran & Prime - Each 5% At first sight it looks like ESRX & CVS should be able to negotiate better costs thanks to their size. In terms of generics I think there is a tradeoff between the ST where more generics producers allow a PBM to make more profits (switching from the branded, better negotiating power) but in the LT if generic drugs are widely available the added value in that segment from a PBM kinda erodes... Interesting industry. Link to comment Share on other sites More sharing options...
kab60 Posted December 9, 2016 Share Posted December 9, 2016 Andrew Left on ESRX: http://video.cnbc.com/gallery/?video=3000574716 Link to comment Share on other sites More sharing options...
DooDiligence Posted December 9, 2016 Share Posted December 9, 2016 He denied trading the puts but is he short? Seems like if you have a big microphone it's perfectly legal to talk your book (Icahn, whoever...) Link to comment Share on other sites More sharing options...
Phaceliacapital Posted December 9, 2016 Share Posted December 9, 2016 I still don't understand how he calculates that a PBM earns more on a drug than the actual manufacturer... Link to comment Share on other sites More sharing options...
skanjete Posted December 9, 2016 Share Posted December 9, 2016 I still don't understand how he calculates that a PBM earns more on a drug than the actual manufacturer... His allegations certainly didn't seem to be very argumented, to say the least. All he basically said was that PBM's were too profitable : "obscene profits"... Maybe his attack was based on his battle with Mallinckrod, cf. his tweet some time ago in which he asked ESRX to rat on Mallinckrod. Link to comment Share on other sites More sharing options...
KCLarkin Posted December 9, 2016 Share Posted December 9, 2016 Just thought of an analogy. The PBMs play a similar role to the credit card companies. With credit cards, the issuers bribe users (with cash back rewards) to use credit cards. The costs of these bribes are paid by retailers. And the costs are eventually passed on to consumers with higher prices. The credit card networks merely facilitate this bribery. The PBMs play a similar role. They facilitate the bribery in the drug channel. But, absent heavy regulation, is there any likelihood that this systematic bribery will end? Link to comment Share on other sites More sharing options...
BPCAP Posted December 9, 2016 Share Posted December 9, 2016 I spent a good deal of time trying to understand the business model, and after talking with people in the pharma value chain, I've put PBMs in the "too hard" pile. The thing is, everything is under constant negotiation and everything is subject to the (often changing) assumptions of a various players including PBM and insurance actuaries, wholesalers, retail, etc. It was surprising to learn just how much a player (pharmacy, PBM, or wholesaler) in the value chain can lose on a large number of SKUs but offset on huge profits in other SKUs...then everything gets re-negotiated. I found this is one of those industries where you think it's knowable and the problem is you're ignorant and haven't taken the time to research and learn. But the more I dig, the more I don't know and there's a lot that's perhaps unknowable to lay person. Link to comment Share on other sites More sharing options...
arcube Posted December 9, 2016 Share Posted December 9, 2016 I spent a good deal of time trying to understand the business model, and after talking with people in the pharma value chain, I've put PBMs in the "too hard" pile. The thing is, everything is under constant negotiation and everything is subject to the (often changing) assumptions of a various players including PBM and insurance actuaries, wholesalers, retail, etc. It was surprising to learn just how much a player (pharmacy, PBM, or wholesaler) in the value chain can lose on a large number of SKUs but offset on huge profits in other SKUs...then everything gets re-negotiated. I found this is one of those industries where you think it's knowable and the problem is you're ignorant and haven't taken the time to research and learn. But the more I dig, the more I don't know and there's a lot that's perhaps unknowable to lay person. + 1. Well said BPCAP Link to comment Share on other sites More sharing options...
Investor20 Posted December 10, 2016 Share Posted December 10, 2016 I still don't understand how he calculates that a PBM earns more on a drug than the actual manufacturer... His allegations certainly didn't seem to be very argumented, to say the least. All he basically said was that PBM's were too profitable : "obscene profits"... Maybe his attack was based on his battle with Mallinckrod, cf. his tweet some time ago in which he asked ESRX to rat on Mallinckrod. I was following the Epipen issue closely and the hearings. I think he was talking about Epipen (mentioned Mylan in the video). The issue is how much of Epipen does Mylan make, vs how much does PBMs get? Below are few articles that talk about it. There is a ethical issue IMO of drug manufacturers paying "rebates" to PBMs. This can lead to higher priced drug being able to give higher "rebate" to PBM and instead of PBMs actually reducing drug prices, are leading to increasing drug prices. Read the Forbes article blow which talks about the "rebates" potentially leading to a competition of price increases than price decrease. This gets to Mungers question of when do higher prices gets higher market share? Specifically for Epipen, as given in the consumerist article below, Mylan testified "The CEO, acknowledges that the wholesale acquisition cost (WAC) of an EpiPen twin-pack is $608, but says Mylan only receives $274 of that after fees and rebates.". So, the question is where is the difference between $608 consumer pays and $274, Mylan says it gets "after fees and rebates". The below Hill article states "On a $600 EpiPen, the PBM is likely receiving close to $300 on each prescription.". That is mylan the manufacturer gets $274, but the PBM gets $300. It is not clear how much of the "rebate" is passing through to consumer, particularly when the consumer with high deductible plan actually pays the full price - the forbes article discusses this aspect. http://www.forbes.com/sites/matthewherper/2016/08/30/the-consumer-rip-off-at-the-heart-of-the-epipen-scandal/#10d9ac4b2a87 http://thehill.com/blogs/pundits-blog/healthcare/294025-how-pbms-make-the-drug-price-problem-worse https://consumerist.com/2016/09/21/congressman-hard-to-believe-mylan-only-makes-50-profit-on-each-epipen/ Link to comment Share on other sites More sharing options...
KCLarkin Posted December 10, 2016 Share Posted December 10, 2016 The PBM does not get $300. Usually 90% of rebates are passed on to payers. http://insights.cvshealth.com/sites/default/files/cvs-health-insights-executive-briefing-epipen-what-you-need-to-know-october-2016.pdf Link to comment Share on other sites More sharing options...
Investor20 Posted December 11, 2016 Share Posted December 11, 2016 The PBM does not get $300. Usually 90% of rebates are passed on to payers. http://insights.cvshealth.com/sites/default/files/cvs-health-insights-executive-briefing-epipen-what-you-need-to-know-october-2016.pdf The Payors in the executive briefing are the employers, not the patients. In fact the briefing clarifies the patients are paying higher in high deductible plans. Many plans now a days have higher deductible than 600$. The quote from Briefing is given below. The above articles I gave from The Hill and Forbes talk about the PBMs getting the rebates, but yet the patient in high deductible plan paying full price which the briefing is supporting. "Members of consumer-driven or high deductible plans can also face a large payment, which can pose a real deterrent when filling the prescription. Payors can make a broad plan design change to share all rebates with consumers at the point of sale to help make prescriptions more affordable for their members." Emphasis in bold added. Link to comment Share on other sites More sharing options...
KCLarkin Posted December 11, 2016 Share Posted December 11, 2016 No. The patients on the high deductible plans are playing the full list price. The PBM and payer then receive a rebate (even though they didn't pay for the drug). BUT the PBM doesn't keep the full rebate. So yes. The drug companies, PBMs, pharmacies, and payers conspire to exploit cash pay customers. And the PBMs play a key role in that conspiracy. But the PBMs are not the main beneficiaries of that conspiracy. The payers are. Link to comment Share on other sites More sharing options...
Investor20 Posted December 11, 2016 Share Posted December 11, 2016 No. The patients on the high deductible plans are playing the full list price. I agree, that is what I gathered from the articles I posted. The PBM and payer then receive a rebate (even though they didn't pay for the drug). BUT the PBM doesn't keep the full rebate. So yes. The drug companies, PBMs, pharmacies, and payers conspire to exploit cash pay customers. And the PBMs play a key role in that conspiracy. But the PBMs are not the main beneficiaries of that conspiracy. The payers are. From consumer point of view, the poorer sections with higher deductibles are subsidizing the richer sections with low deductible plans. But the Forbes article goes further. They argue that higher rebates are paid by higher priced manufacturers. So, there is an incentive to raise the price in the system, not decrease it. The system is IMO pushing consumers to pay for higher charges within deductible. Typically drugs are going to be within deductible but drug costs are year after year. Whereas a surgery would be once in a while but typically well above the deductible. They are systematically making people pay into the deductible than one should if the drug product is simply priced as it should be (without rebate). Link to comment Share on other sites More sharing options...
Phaceliacapital Posted December 12, 2016 Share Posted December 12, 2016 • We strongly disagree with the recent short thesis regarding Express Scripts, and we are reiterating our $100 fair value estimate and wide moat rating for the stock. From our perspective, the recent short arguments that have been made are fundamentally wrong and misunderstand the flow of the pharmaceutical supply chain. Most developed Western countries have established a single-payer system, with the central governments dictating all aspects of their respective healthcare markets. The United States does not have a single-payer/government-run healthcare system, which creates the need for large sophisticated entities, such as pharmacy benefit managers, to help facilitate pricing concessions from suppliers and build operating efficiencies into the market. Pharmaceutical pricing is a very ambiguous variable, and to many individuals both in and out of the healthcare industry, it is almost impossible to fully understand. This is especially the case for branded pharm aceuticals, as these drugs have many elements to their pricing schemes. With that as the backdrop, many healthcare stakeholders have unjustifiably assigned the blame for perceived high-priced drugs to PBMs, in particular Express Scripts. Certain investors have seized on this pricing misinformation to build a bear case against the sector, and we believe this has unduly pressured stock prices. This dynamic has weighed heavily on Express Scripts’ equity, as there is a belief the PBM extracts an exorbitant amount of value from brand prices through retaining a significant portion of manufacturer rebates (discounts). From our perspective, this outlook is fundamentally wrong, as our analysis of branded pricing and rebates reveals that Express Scripts and its PBM peers are able to keep only around 1% of the average branded gross price and 10% of the average branded rebate. Ninety percent or more of branded rebates are passed on to the PBM client. Based on profit, pricing, and volume data from several sources, we have dissected the various components of a branded drug’s gross price to determine the portion each major player is able to retain. The results we derived from our analysis support our wide moat ratings for PBMs and highlight the value these firms can deliver to payer clients. In our recent report ("The Price of Drug Middlemen: Clarifying Pricing for Express Scripts"), we counter each of the major bear-case points recently made and provide our detailed analysis surrounding the drug pricing dynamic. Our analysis bolsters our outlook for Express Scripts. We believe the market’s misaligned outlook has caused the firm’s stock to trade materially below our fair value estimate, making it one of our Best Ideas. Link to comment Share on other sites More sharing options...
DooDiligence Posted December 12, 2016 Share Posted December 12, 2016 I tend to agree with your disagreement simply based on the thin margins Express Scripts garners (probably a simplistic reason but after all, I am one of Talebs "lucky idiots.") I tried Googling that report you cited in the last paragraph & couldn't find it. Someone else posted one (I think on the CVS thread) about Unlocking the Pharma Black Box which was interesting in a different way... Link to comment Share on other sites More sharing options...
bonkers Posted December 12, 2016 Share Posted December 12, 2016 How to solve a conundrum nobody seems to properly understand? President-elect Trump will simply dictate drug prices lower: https://www.bloomberg.com/news/articles/2016-12-07/trump-says-he-ll-bring-down-drug-prices-biotech-stocks-fall Problem solved. ;) Link to comment Share on other sites More sharing options...
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