PBMs: PBMs doing well while CaremarkRx/AdvancePCS’ deal is still uncertain

The newly independent PBM Medco Health Services’ stock has been doing very well since its independence from Merck just a few months ago.  In fact if you received Medco stock at the time of the disbursement you’ll find that it’s up about 30% while Merck’s is down about 15%. There are some grumbles on the Medco message board about the management, but that’s being ignored by the market  which has bid the stock up more than $5 since Medco increased its projected earnings for next year (from 44 cents a share to between 44c and 47c).

Meanwhile competitor CaremarkRx has also seen a decent rise in its stock. It’s now back up to roughly where it was before it fell on the news that it was "overpaying" for rival AdvancePCS on September 3. On Tuesday it announced results that beat the market’s expectations by a penny. More interestingly Caremark seems to be shrugging off a recent lawsuit that claimed it misled shareholders over a settlement concerning its failed purchase of Phycor back when it was called Medpartners. Neither its stock price nor that of AdvancePCS showed any concerns that the FTC’s has made a ‘Second Request’ regarding the merger deal. While the lawsuit claiming $3.2 billion is probably a long-shot, the FTC does have to look carefully at the merger. 

Between them Caremark and Medco control a big chunk of the mail-order drug market.  If the merger goes through, Caremark’s main job is increasing AdvancePCS’ use of mail-order. Currently about 10% of Advance’s drugs go out via mail order, whereas for Caremark it’s about 40%. (Medco’s is around 33%)  Of course supplying a drug via mail-order is much more profitable than just processing the claim and having another pharmacy fill the script.  If Caremark manages to increase mail-order use, it becomes a significant lever in its dealings with both pharmacies and perhaps manufacturers, and mail-order overall will become much more significant–something the FTC will be watching. This market concetration also goes for supplying mail-order and other services in the specialty pharmacy market–usually based around drugs for specific relatively rare diseases which use a lot of expensive drugs.. The Drug Cost Management Report (full article well worth reading) notes that:

    The existing managed care clients that AdvancePCS brings to the table could theoretically give the new company enough leverage to severely disadvantage other specialty pharmacy players, including CVS ProCare, Accredo Health, Curascript, Chronimed, Option Care and MIM Corporation’s Bioscrip unit.

Added to this concern from the FTC is the accusation from pharmacies that Medco and other PBMs are deliberately routing scripts away from them to their mail-order businesses. Meanwhile others like health plan Highmark are getting into this business.

Meanwhile the big health plans are likely to be looking at the PBM market. Given that merger-mania and the underwriting cycle will eventually reduce the possibilities for revenue growth in that market, reintegrating health plan and PBM services must be tempting to the folks in Indianapolis and Minneapolis.  After all, it’s not as if PBMs have actually helped health plans or employers actually do what they were supposed to do over the past decade–reduce the cost of the drug benefit!

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