ESRX - Express Scripts

[DooDiligence]

Nothing back from my ex-employer’s medical officer yet (will phone him today.)

 

I listened to the recent ESRX call & came away with a few things that reading the transcript didn't convey.

 

Management stated that winning at all costs is not how they plan on doing business & they tied it in with their new & upcoming value based products (meaningful use.)

 

I think management has done the right thing by disclosing that Anthem is gone & by showing us just what Anthem contributes. Interestingly, nobody at Anthem has said that they didn’t say “bugger off at the end of 2019” so they must have said it (directly to Tim Wentworth?)

 

Eric Susser (the CFO) seems like the bad cop to Tim Wentworth’s good.

 

Susser’s all, “we’re losing the business, whatever, I got this” (very confidently & convincingly) & he seems to have a firm handle on expenses & is planning for worst case SGA reductions.

 

It took 3 years to onboard Anthems business & ESRX is obligated to provide services for up to a year after contract expiration (they hopefully won’t lose a meaningful amount of revenues until early 2021) & in the meantime, they’ll generate a ton of cash which they’ve stated will largely go towards paying down debt.

 

Mentioned acquisitions but it didn’t sound like they were looking for anything big (my opinion) and would prefer to remain asset light.

 

Said they have new products coming which will address high deductible patients (sticking with the altruistic intent.)

 

ESRX needs to mend some fences on the consumer facing end of the business in order to truly come full circle with the whole altruism thing (a tall order given the level of dissatisfaction out there.)

 

Self insured clients are aware of the unique agreement with Anthem & the up front payment to them in exchange for worse terms (not something that concerns their individual contracts.)

 

Personally, I believe ESRX has delivered above & beyond with the "exception" payments to Anthem, which went outside contractual requirements (so says management & I may just be drinking the Kool-Aid.)

 

If ESRX is delivering results to Anthem (and they’ve shown they’re willing to give even more) then why would Anthem not renew with them?

 

I wonder if they could whip a Walgreen’s on Anthem & take a big chunk of business somewhere else? Who could they do this with for Part D?

 

They’d probably have to be acquired by a big payer in order to open up a gigantic can of whoopass on BCBS (I’m thinking Aetna has the resources to buy ESRX.)

 

Then when the contract rolls off & the 1 year post contract support is up, patients can be seamlessly transferred to Aetna!

 

(drops pom pom's)

 

—

 

These guys say EBITDA a bunch.

 

Don’t you just want to smack someone when they say EBITDA? When they say it twice within about 5 seconds, they start sounding like foreigners (insert your own country here.)

 

EBITDA’s aside, I kinda trust these guys & I doubled up pretty close to the bottom $58.97 (felt good to be up at the end of the day even though it meant nothing) & bought some Jan 2019 $50 Calls (could be my Valeant moment…)

 

Best possible outcome, Tim Wentworth, George Paz, Joe Swedish & Eric Susser tongue kissing each other in a hot tub filled with money!

[tooskinneejs]

Interesting article that explains and diagrams the money flows in the drug industry between manufacturers, wholesalers, pharmacies, consumers, PBMs, and insurers:

 

http://www.businessinsider.com/express-scripts-esrx-anthem-not-renewing-pbm-2017-4

 

Except, the "article" appears to be complete BS. It says that the PBM is making $35 on a $100 list price script. ESRX in their last news release stated that they are making $2.05 in EBIDA per claim.

 

You are comparing revenue to a measure of profit.

[DooDiligence]

So I called the ex-employers medical officer & didn't get past the receptionist (left a brief message...)

 

Here's what I want to ask him:

 

Does ESRX save the company money & do they demonstrate the savings to you convincingly?

 

Do your accounting & oversight personnel actually understand what Express Scripts is billing them for or do they just throw up their hands & write checks?

 

Does ESRX break out the variable drug spend from fixed service fees?

 

What products do you buy & how long are contract durations (do you get unexpected cash bumps from ESRX?)

 

Do sales reps contact you directly?

 

How do they go about selling services to you?

 

Tell me about the negotiation process.

 

How much does the company spend per year on drugs?

 

How much do you get back in rebates as a % of total spend?

 

Do you pay up front for contract services or as incurred?

 

Do you feel good about the relationship with ESRX?

 

Have you been approached directly by other PBM’s (CVS Caremark, UNH Optum)

 

-----

 

If this guy won't talk to me I'm gonna have to find someone else to call...

[KCLarkin]

You are comparing revenue to a measure of profit.

 

Not quite. If I follow their logic, the "revenue" in their example would be $130. The article implies they "made" $35. They don't specify what this means but it is presumably gross profit.

 

Is it realistic that they are making $35 in gross profit and only earning $2.05 EBIDA?

[DooDiligence]

You are comparing revenue to a measure of profit.

 

Not quite. If I follow their logic, the "revenue" in their example would be $130. The article implies they "made" $35. They don't specify what this means but it is presumably gross profit.

 

Is it realistic that they are making $35 in gross profit and only earning $2.05 EBIDA?

 

Holy guacamole, I was adding a T to EBIDA

 

it sounds so much better the way you say it  ;D

[Spekulatius]

So ESRX loses16% of their revenues, but 31% of their EBITDA, which means that the margin on their Anthem business was twice as high than that of the remainder.

Losing 31% of the EBITDA will certainly hurt - I am guessing net in one should be down at least 40%, in that light, ESRX share price decline has actually been fairly moderate.

[DooDiligence]

So ESRX loses16% of their revenues, but 31% of their EBITDA, which means that the margin on their Anthem business was twice as high than that of the remainder.

Losing 31% of the EBITDA will certainly hurt - I am guessing net in one should be down at least 40%, in that light, ESRX share price decline has actually been fairly moderate.

 

I agree, it seems like the price would have fallen more (volume was nearly 10 times above normal.)

 

Regarding Anthem's paying double the service fees of most other clients, remember that ESRX paid Anthem $4.7B up front for the contract in exchange for lousy terms (Anthem chose the up front cash knowing full well what they were getting into & thinking that they were f*ing George Paz.)

 

In addition, ESRX has made "exception payments" to Anthem which go beyond contractual obligations (I have no details on the exceptions other than the fact that there have been payments made.)

 

ESRX says that volumes were below contractual requirements in the initial years & it looked like the $4.7B might have been a mistake but then the Medco deal enabled them to rationalize costs & the Anthem business became profitable.

 

The fact that Anthem hasn't disputed anything that ESRX management has said, leads me to believe that ESRX has the high ground here.

 

I'm probably just being all "gimme some confirmation I've done the right thing" here.

 

I'd really like to hear the thoughts of past posters from here & the CVS & Davita threads (come on guys, someone's gotta hate me enough to wanna burn this idea down & make me look like a dumbass...) (OTOH, maybe I'm doing that well enough with no assist tug...)

[DooDiligence]

Interesting to see about Brave Warrior here.  They initiated a position in Q4 and after the after hours drop wonder how they'll proceed.

 

Now all I need is for Andrew Left to start mouthing off...

[Spekulatius]

Well, if ESRX mad acquired a business for $4.7B that made $2B annually ten years later, they got a pretty good deal, imo. Since the business has twice the margins than the remainder, it is clear that Anthem wants to renegotiate. There is no "high ground" in  a situation like this - ESRX would need to provide value and I Anthem think they can get a better deal going elsewhere.

I bought a few shares in ESRX about 1 1/2 years go, but grew increasingly concerned by the contentious customer relationships. This made me think that ESRX franchise is not as strong as they claim it is. I also think that this PBM business is a layer that should really be integrated in the insurance operation, the way it used to be.

[DooDiligence]

Well, if ESRX mad acquired a business for $4.7B that made $2B annually ten years later, they got a pretty good deal, imo. Since the business has twice the margins than the remainder, it is clear that Anthem wants to renegotiate. There is no "high ground" in  a situation like this - ESRX would need to provide value and I Anthem think they can get a better deal going elsewhere.

I bought a few shares in ESRX about 1 1/2 years go, but grew increasingly concerned by the contentious customer relationships. This made me think that ESRX franchise is not as strong as they claim it is. I also think that this PBM business is a layer that should really be integrated in the insurance operation, the way it used to be.

 

 

I agree & if Aetna would just step up & make a $60B offer for ESRX (they'd be buying $20B in FCF over the next 4 years & maybe another $20B over the next 6 years...)

 

 

That plus the cost savings for them would make it a decent investment.

 

 

Pricing power over vendors would be the big win (not sure how it'd affect client pricing.)

 

 

(I am fully aware that I'm being delusional here...)

[Scuttlebutt Plunger]

Could be a possibility.  Aetna's interest in Humana definitely accounted for Humana's small pbm (for their members only).  It is interesting that ESRX is the sole pure play PBM left.

 

There are serious synergies from tucking a PBM into a health insurer, I.e. Optum and UnitedHealth.  The claims database and ability to increase medical adherence is invaluable, if they can execute.

[DooDiligence]

Could be a possibility.  Aetna's interest in Humana definitely accounted for Humana's small pbm (for their members only).  It is interesting that ESRX is the sole pure play PBM left.

 

There are serious synergies from tucking a PBM into a health insurer, I.e. Optum and UnitedHealth.  The claims database and ability to increase medical adherence is invaluable, if they can execute.

 

 

Adherence & compliance are 2 huge drivers of efficacy & can definitely be used to improve efficiency & bolster brands.

 

 

The question is, is Express Scripts able to influence patients to take their meds correctly? (especially when their relationships with patients are so contentious...)

 

 

Still waiting for a return call from the ex-company medical officer (starting to wonder if it matters...)

 

 

Hell yeah, it matters (I have a beginning to the ESRX story but no middle & it's impossible to guess the end without it...)

[DooDiligence]

I figure the lack of response re: ESRX is due to:

 

 

1. Not wanting to waste time on something that's already in the "too hard" pile.

 

2. Don't care because drugs are already cheap where I live.

 

3. No desire to touch pom pom's with a retarded cheerleader.

 

(forgot to add, (4. There's already quite a few intelligent VIC write-ups...)

 

---

 

Someone burn this idea down (make me soooo embarrassed for buying this that I remove all my holdings from my signature & never post again...)

[clutch]

It's just too hard to see (or even believe) what's going to happen in the future.

[DooDiligence]

It's just too hard to see (or even believe) what's going to happen in the future.

 

 

True & I think the real killer is that they're in the non-innovative end of the business...

[DooDiligence]

I wonder if Anthem can make it work with minimal disruption using Prime Therapeutics?

 

 

Legislative price controls could offer a tailwind to their reduced vendor pricing power...

[no_free_lunch]

Rather than killing the idea, I am wondering what is the bull case here and the upside?  To me, it feels like it could be worth a small position (1-2%) based on some statistical things, low PE, economy of scale but beyond that when I try to look into the details of the business it just gets too messy and there are so many unknowns.

 

I think I would be more interested around $50 or lower as that prices in a lot of the anthem loss.  Although without anthem they start to lose their economy of scale which could set off a slow downward spiral.  So it would still be a small position.

[DooDiligence]

Rather than killing the idea, I am wondering what is the bull case here and the upside?  To me, it feels like it could be worth a small position (1-2%) based on some statistical things, low PE, economy of scale but beyond that when I try to look into the details of the business it just gets too messy and there are so many unknowns.

 

I think I would be more interested around $50 or lower as that prices in a lot of the anthem loss.  Although without anthem they start to lose their economy of scale which could set off a slow downward spiral.  So it would still be a small position.

 

 

Thanks, I'm at about 13% (including the LEAP's) which probably is excessive for a non-innovative service provider (lucky number 13)

 

 

The upside I see in the business could come from mail order.

 

 

They operate 4 automated & 1 un-automated home service fulfillment centers & have virtually no inventory on the books in comparison to ABC, CAH, etc., but a ton of goodwill.

 

 

If they can scale up the mail order business?

 

 

Listening to ABC Q4 2016 webcast to learn more...

[DooDiligence]

Just listened to the Q4 2016 ABC call.

 

The MWI investment looks good.

PharMedium looks like a driver.

Signing long term contracts with large buying groups (pricing may create headwind.)

Walgreens is 30% of business & owns 15% of ABC (nicely aligned.)

Generic deflation seen to decrease revenues & brand price inflation is helping.

CEO said they’re “planfull” with regards to WBC / Rite Aid & on-boarding new business (also said the market is competitive but rational.)

ABC returns a lot of cash to shareholders (aggressive share purchases for the past 2 years.)

 

Both ESRX & ABC are big contract organizations & ABC seems to provide more value to the system than ESRX with a lot more transparency.

 

Separating the inventory from the service that ESRX performs seems kind of stupid to me.

 

I think an ABC owned PBM would add more value to the system than having a payer like Aetna owning a PBM (keeping the supply logistics closer together just seems better.)

 

And a WBA ownership of both would really consolidate the chain...

[Spekulatius]

Could be a possibility.  Aetna's interest in Humana definitely accounted for Humana's small pbm (for their members only).  It is interesting that ESRX is the sole pure play PBM left.

 

There are serious synergies from tucking a PBM into a health insurer, I.e. Optum and UnitedHealth.  The claims database and ability to increase medical adherence is invaluable, if they can execute.

 

 

Adherence & compliance are 2 huge drivers of efficacy & can definitely be used to improve efficiency & bolster brands.

 

 

The question is, is Express Scripts able to influence patients to take their meds correctly? (especially when their relationships with patients are so contentious...)

 

 

Still waiting for a return call from the ex-company medical officer (starting to wonder if it matters...)

 

 

Hell yeah, it matters (I have a beginning to the ESRX story but no middle & it's impossible to guess the end without it...)

 

Daubtfulthat ESRX can improve adherence much.What do they know about the patient? they can probably tell if the patient is not refilling his Meds when he should, which probably is sign that he is not taking them as he should, because but besides that....

[Scuttlebutt Plunger]

Could be a possibility.  Aetna's interest in Humana definitely accounted for Humana's small pbm (for their members only).  It is interesting that ESRX is the sole pure play PBM left.

 

There are serious synergies from tucking a PBM into a health insurer, I.e. Optum and UnitedHealth.  The claims database and ability to increase medical adherence is invaluable, if they can execute.

 

 

Adherence & compliance are 2 huge drivers of efficacy & can definitely be used to improve efficiency & bolster brands.

 

 

The question is, is Express Scripts able to influence patients to take their meds correctly? (especially when their relationships with patients are so contentious...)

 

 

Still waiting for a return call from the ex-company medical officer (starting to wonder if it matters...)

 

 

Hell yeah, it matters (I have a beginning to the ESRX story but no middle & it's impossible to guess the end without it...)

 

Daubtfulthat ESRX can improve adherence much.What do they know about the patient? they can probably tell if the patient is not refilling his Meds when he should, which probably is sign that he is not taking them as he should, because but besides that....

 

ESRX inside a health insurer can in fact boost adherence, if done correctly.  UNH has already done it...  Analytics, such as reminding patients to refill meds, take meds, etc.  They can also be used to identify high risk patients and get ahead of the curve.

 

http://phrma-docs.phrma.org/sites/default/files/pdf/PhRMA_Improving%20Medication%20Adherence_Issue%20Brief.pdf

[DooDiligence]

ESRX may be walking dead because of the WBA ABC alignment (and UNH Optum, CVS Caremark and more...)

 

Can enough be extracted for owners to make it worth holding? (No, there's not much left if the biz goes bust...)

 

Someone will likely pilfer the corpse for the valuable bits (unless George Paz manages to make the sale of a lifetime...)

[DooDiligence]

Holy mother of god

 

https://aws.amazon.com/health/healthcare-partners/

[DooDiligence]

2017 BofAML Conference

 

http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=69641&eventID=5256740

 

Lots more transparency & valuable discussions about operations in the PBM business  (seriously, bull or bear they talk about some important stuff...)

They’re promoting themselves rationally & seem honest (no mud slinging, Anthem's done.)

The new found altruism & openness needs to make its way to patients (GoodRX is running with that.)

 

MyMatrixx purchase gets them a book of business in Workman’s Comp & the founder CEO Steve MacDonald created a great culture there (don’t know how involved he’ll be post purchase.)

 

http://www.joepaduda.com/2017/05/express-scripts-buys-mymatrixx-smart-move/

 

He estimates they paid $300M to $350M for MyMatrixx.

 

—

 

Profile of MacDonald (Founder & CEO of MyMatrixx)

 

http://www.ih-mag.com/health-solutions/1473-mymatrixx.html

 

—

 

SafeGuardRX solution driving new biz & client retention.

Saving money for payers, patients & clients.

Rebates are getting better & are being passed to payers.

 

The discussions about negotiations & value based care are very informative.

 

These guys sound like pharma supply chain logistics experts!

 

My Twitter feed for more on ESRX, FFXDF & other stuff…

 

[DooDiligence]

http://www.ajpb.com/journals/ajpb/2015/ajpb_julyaugust2015/is-pbm-transparency-an-answer-to-controlling-rising-drug-costs?p=2