Two major issues have weighed on Express Scripts’ share price this year. There is an ongoing contract dispute between the benefits manager and Walgreen Company (WAG). And Express Scripts’ proposed merger with Medco Health Solutions (MHS) has faced intense regulatory scrutiny.
health care realms as a result of competitive concerns.
Historically, Express Scripts’ shares have out-performed Medco’s stock by 8 percent to 10 percent, largely due to Express Scripts’ already dominant market share. In the event that regulators nix the deal, Express Scripts will enjoy even greater dominance of the industry because Medco has lost three major PBM contracts so far this year. So Express Scripts should benefit regardless of whether or not the deal goes through, particularly since there won’t be a breakup fee involved.
The dispute with Walgreens is also likely to work out in favor of Express Scripts. As a PBM, Express Scripts essentially acts as an intermediary between pharmacies and insurance companies, negotiating the rates paid by insurers for prescription drugs. As a result, Express Scripts pushes pharmacies to eat a portion of health care cost inflation in the form of lower payments toward prescriptions. The core of the dispute is that Walgreens wasn’t willing to accept the payout rate offered by Express Scripts. Walgreens believed that Express Scripts would eventually yield to its demands by virtue of its position as the second-largest pharmacy chain in the U.S.
But Walgreens appears to have miscalculated. Express Scripts’ client retention rate has barely budged since the dispute began because its clients are willing to accept more restricted pharmacy access in exchange for lower costs. If Express Scripts’ clients don’t abandon them, Walgreens isn’t likely to prevail.
The market is not as favorably disposed toward Express Scripts as it once was, but that situation should change when it once again recognizes the firm’s dominance of the PBM market and ability to grow earnings.
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