Fitch: Anthem/Express Dispute Could Shape Evolving PBM Industry

NEW YORK--(BUSINESS WIRE)-- 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 (PBM) industry and implications for Express Scripts' independent business model, Fitch ratings says.

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 FCF ($2 billion expected in 2016) is sufficient to repay debt in the event of a negative development pertaining to its Anthem contract. Anthem accounted for 16.3% of Express Scripts' total 2015 sales, or roughly $16.6 billion. 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.

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 US 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.

Despite the general lack of publicly disclosed drug pricing information, Fitch believes that pharmacy benefit manager's products and services play integral roles in supporting health insurers' operations and competitiveness, and in moderating the cost of prescription drugs as a whole.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160322006064/en/

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Source: Fitch Ratings

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