Express Scripts (NASDAQ:ESRX) declined 20% during the quarter due to a dispute with its largest client, health insurer Anthem (which accounts for 15%-20% of Express Scripts’ sales), as Anthem believes that Express Scripts needs to pass on larger drug cost savings to its customers. Under the existing contract, Anthem is entitled to a good-faith repricing of the contract terms, the deadline for which was December 15, 2015. As the deadline has passed and Express Scripts still has not provided Anthem with an offer that Anthem deems acceptable, Anthem has recently decided to take legal action against Express Scripts. Express Scripts’ CEO stated the company intends to resolve the dispute and keep Anthem as a customer.
We believe the market has over-reacted to the dispute as the current valuation prices in more than a complete loss of the Anthem contract. While there are multiple possibilities, we believe the most likely outcome is a renegotiation to extend the contract, likely at a lower margin but with increased volumes due to Anthem’s acquisition of Cigna. However there is a risk that Anthem switches to another vendor or brings the business in-house, although it lacks scale relative to peers. Given that the market seems to have priced in the worst-case outcome, we continue to believe that Express Scripts offers an attractive margin of safety.
From Brandes' Global Equity Fund first quarter 2016 commentary.
