For serveral weeks the odd rumor that PBM Caremark was going to buy AdvancePCS showed up in the Yahoo ADVP message board. While you shouldn’t usually trust what those boards say, this time they were right. Caremark announced a roughly $5 billion agreed bid for AdvancePCS, which sent Advance stock up from $40 to $47 and Caremark’s down from $24 to $22. On the face of it, with a newly freed Medco the big gorilla in the marketplace, this is a decent consolidation move. Caremark is stronger in mail-order and more profitable, AdvancePCS has more lives, especialy in the health plan world, and has probably made a little more progress in the eHealth and DSM world. However, the price thay are paying is some 35% higher than AdvancePCS has ever traded on the open market, which is quite a premium — hence the decline in Caremark’s stock. Longer term it leaves three big PBM players for whatever role for PBMs comes out of the Medicare Rx bill, now in negotiations between the house and the Senate.
Looks like the PBM stocks are now taking a downward move . Express Scripts’ stock (ESRX) is under pressure partly following some comments from a short-seller in Barrons. Meanwhile, Medco (MHS)continues upwards. Some of this is probably caused by institutions re-allocating their PBM portfolio. Medco has added about a billion in market cap since it started trading last week, and is now finally worth a little more than what Merck paid for it back in 1994–not bad when you condsider that PCS (ADVP) has still not come close to being worth the $4 billion Eli Lilly paid McKesson for it back then!
So Medco has officially split off from Merck as of this week, and is trading separately on NYSE, ticker is MHS. The stock actually rose 10% its first day adding over $600m to Medco’s market cap and (after accounting for the value of Medco shares issued to shareholders) Merck rose too! This indicates partially that institutions like the future of the PBMS, all of which have rallied slightly along with Medco. It’s worth noting that Medco’s market cap is 80% greater than that of AdvancePCS.
Meanwhile Medco has been at pains to say that it will be totally separate from Merck, and the market may be taking this to mean that it will be able to get the best deal, rather than the best deal after Merck’s need have been considered. It may also be indicative that the market believes that Medicare reform will be good for PBMs. As I mentioned in an earlier post, that is likely but by no means certain.
Pity the poor PBM industry. Hailed in the early 1990s as the solution to manage health care costs, bought up by the drug industry for far, far too much money in the mid-1990s, and investigated on again/off again by various attorney generals ever since over their relationships with drug manufacturers. In early 2000 due to another investigation, their stock price tumbles and one of the biggest (PCS) gets bought by one of the smallest (Advance Paradigm) at a fire sale price. So ends the decade, but a funny thing has been happening. Remember that PBMs are supposed to be working on behalf of health plans and employers to get drug costs down. But overall drug costs have gone up massively all this time (as have brand prices mostly due to the new blockbusters of the 1990s.). But so have the PBMs’ profits and their stock prices.
There are four main lines of revenue for a PBM. 1) Claims processing/transactions with all the formulary stuff and presumably price discounting that goes with it 2) Switching people between different drugs based on rebates from the manufacturers, and doing other drug promotions, 3) mail-order pharmacies, and 4) a loose bunch of activities some companies call health promotion, which also includes DSM, data analysis, etc. Buried somewhere in there is the level of risk they take on from their clients, although the answer seems to be "not too much". No one will give you a straight answer about what proportion of their revenue comes from which activity, which makes Sen. Cantwell (D-WA) suspicious enough to ask them to disclose their deals in the new Medicare legislation. Until now their mail-order piece was very profitable (and supposedly is why Express Scripts’ market cap is around $5bn, Caremark’s around $6bn but AdvancePCS’ only at $4.5bn although it has far more covered lives than the other two.) Medco is being spun off by Merck next week and it also has a strong mail-order side. Now they are also under what looks like a pre-emptive strike from the pharmacists who for some reason believe that the PBMs are using their formulary management techniques to steer business to their mail-order divisions — imagine that!
This presages the main question of what role PBMs will play in whatever eventually comes out of Congress on Medicare drug coverage. Are they going to get the biggest bonanza in their history (all those lovely seniors signing up)? Or are they going to lose all their abilities to make money the way they’ve do now, and be turned into government data processing agencies with PE ratios to match? With their stocks recently close to their all time highs, this is a space to be watched.