Replies to post #72746 on Biotech Values

[DewDiligence]

From an investors’ perspective, PBMs make money. From a global perspective, just because PBMs make money doesn't mean they are effective at lowering costs.

I don’t think we can completely separate these two observations. If PBM’s are really and truly providing no benefits to their clients, isn’t it only a matter of time until this becomes common knowledge? When it does, how will PBM’s be able to hit their growth targets or even sustain their existing profitability?

If what you are saying is true, the PBM stocks would seem to be better candidates for short positions than long ones.

[DewDiligence]

CVS's Bold Bet on Healthcare Reform

[This article fits in perfectly with the recent thread on this board about whether PBM’s provide any value to their clients—or to society at large. Comments are welcome from rph_in_wi and anyone else.]

http://finance.yahoo.com/news/CVSs-Bold-Bet-on-HealthCare-bizwk-14351716.html

›By Matthew Boyle
Friday February 13, 2009, 8:08 am EST

During his 15 years as CEO of CVS (NYSE: CVS ), Tom Ryan transformed the company from a New England drugstore chain into a national health-care colossus with $76.3 billion in annual sales. He did that through a string of major acquisitions, paying $27 billion for drug middleman Caremark in 2007 and $2.9 billion for West Coast regional chain Longs Drug Stores last October [#msg-31413315].

CVS Caremark is now one of the 20 biggest companies in America, surpassing Boeing, Target, and Johnson & Johnson. The Woonsocket (R.I.) outfit is the largest single buyer and dispenser of prescription drugs in the nation. The Longs deal extends the chain's retail presence from Maine to Hawaii, with nearly 7,000 stores and more than 50 million users of its CVS loyalty card in the U.S.

What does Ryan intend to do with his drugstore empire? His goal, he says, is to help transform America's expensive and often ineffective health-care system. Seeking to take advantage of President Barack Obama's commitment to health-care reform, Ryan wants to use CVS's vast prescription database and burgeoning network of in-store clinics to treat patients with chronic diseases and help keep them out of the hospital, where most medical costs are incurred. "I don't think our health-care system is broken," Ryan says. "We are just spending too much, and it's unproductive."

Few industry experts would argue. Hospital visits prompted by chronic illnesses such as diabetes, heart disease, and arthritis impose an immense burden on health resources in the U.S. The total annual bill for diabetes alone is upwards of $170 billion, according to the American Diabetes Assn. Many of these costs would evaporate if patients simply complied with their doctors' orders and took their medications. In fact, about one-third of all patients who begin a drug regimen never refill the prescription, either because they don't feel sick, they forget, or they don't want to spend the money.

Ryan believes CVS could help solve this problem and, in the process, boost its own bottom line. As a pharmacy benefit management company, the Caremark unit handles drug coverage for large employers and health plans, negotiating discounts with drugmakers. It owns a treasure trove of prescription drug data, as does CVS. The merged company is thus an info-tech Goliath, filling or managing more than a billion prescriptions a year. It can use that information to figure out which customers require a gentle reminder to come in for a refill. As a result, customers would buy more drugs, make ancillary purchases in the store, and maybe even visit the clinic. Ryan's challenge is convincing CVS customers that such refill reminders aren't just marketing tactics. He is encouraged that the Obama Administration recognizes the importance of drug compliance and will support private sector initiatives. As debates over health-care reform heat up this spring, Ryan will argue that his aggressive strategies also make good medical and economic sense.

Recession Effect

The recession is likely to test Ryan's resolve. Drugstores usually are more immune to slowdowns than other retailers, but not today. Consumer spending dropped 3.5% in the fourth quarter of 2008. The slumping U.S. economy will cause pharmacy sales to grow only 1% or so in 2009, the slowest clip in years, according to data tracker IMS Health (RX). On Jan. 9, CVS forecast a smaller 2009 profit than previously expected because of lackluster performance at Caremark [#msg-34720729]. CVS's stock declined 27% last year and is flat so far in 2009.

Steering a company through tough economic times while trying to reinvent health care is a lot to handle. Is Ryan up to it? Derek Leckow, an analyst at Barrington Research in Chicago who has watched CVS's rapid evolution, has reservations. After all, Ryan doesn't have a typical CEO resume. He nearly dropped out of pharmacy school after struggling with organic chemistry. Even Ryan notes that he got his first job at CVS not through a display of talent but because he was the only applicant to show up wearing a tie. Tall and affable, the wisecracking Ryan, 56, sometimes seems more like a friendly neighborhood pharmacist than a hard-charging, visionary leader. "Tom is very smart, but he doesn't want you to think that," says David B. Rickard, CVS's chief financial officer. "He'd rather have you think he's a nice guy than a smart guy."

The son of a newspaper plant worker, Ryan was a standout student and athlete at River Dell High School in Oradell, N.J. "He was a big man on campus," says Ronald Jordan, interim dean of the pharmacy school at the University of Rhode Island, who attended high school and college with Ryan. At URI, Ryan "was a good student, but not sensational," says Norman Campbell, a professor emeritus at the school. It was Campbell who encouraged Ryan to apply for an internship at CVS. "I didn't know what the hell (it) was," Ryan recalls.

Working behind the pharmacy counter, Ryan made lots of friends in Woonsocket, a downtrodden former mill town just south of the Massachusetts border. His lucky break came at age 29, when CVS co-founder Stan Goldstein named him head of pharmacy operations after the company's intended hire backed out. "What the hell -- he'll make some mistakes, but he'll do fine," Goldstein recalls thinking.

Ryan didn't feel ready for the role, and he did make mistakes. Among other things, he opposed drive-through pharmacies, thinking they would reduce sales of candy and cosmetics. (They didn't.) Yet he also displayed solid business instincts. "He has a razor-sharp focus on what's important," says A.G. Lafley, CEO of Procter & Gamble, a CVS vendor. "He cuts through complexity to get to the point."

M&A GAFFES

That skill, plus Ryan's outgoing personality, prepared him for handling the tricky integration of the various drugstore chains CVS gobbled up starting in the late 1980s. CVS is known as a well-oiled acquisition machine, but it was not always so. "The first few (deals) were not so wonderful," Goldstein recalls. There were early fumbles in attempts to mesh disparate computer systems and cultures. And sometimes the process simply dragged on too long. "We've gotten better with each acquisition -- we've gotten faster," Ryan says. "What makes (CVS) successful is there's no screwing around," says Neil Stern of retail consultancy McMillan Doolittle. Ryan's no-nonsense approach to the acquisition of Peoples Drug in 1990 persuaded Harvey Rosenthal, the company's president at the time, to pick Ryan as his successor.

In his stores, Ryan is obsessed with service. He has been known to cold-call CVS pharmacies just to see how long it takes for someone to pick up the phone. His interest is not academic: A fifth of his annual bonus is based on how his stores do on a customer service survey. "I can walk into any store and tell you what the last five customers said about it," he boasts. Good things, apparently. Ryan took home a $5 million cash bonus in 2007, part of a $26 million pay package.

The customer base has expanded of late. The Caremark deal thrust CVS deep into the world of pharmacy benefit management (PBM) companies, which all major chains have set up in the past decade. But just three -- Medco (NYSE: MHS), Caremark, and Express Scripts (NasdaqGS: ESRX) – dominate, running automated mail-order facilities that fill prescriptions faster than drugstores can.

PBMs have encouraged their corporate clients to save money by filling recurring prescriptions in 90-day quantities through the mail at a reduced per-pill cost. One in four employer-sponsored prescription plans has such a "mandatory mail" program, says benefits consultancy Hewitt. This eats into a drugstore's bread-and-butter prescription revenue and also affects higher-margin "front-end" sales, since people who receive drugs by mail have little reason to swing by CVS for other products. Before the merger, "the mail guys were taking business from us," says Ryan. "We were fourth in a three-man race."

The idea to combine a national drug chain with a PBM -- essentially, a merger of adversaries -- was novel, and some still question it. "I'm not willing to say it was a great move at this point," says Morningstar analyst Mitchell Corwin. The proof may well depend on how broadly Obama and his team promote the cost benefits of managing chronic diseases. Certainly, they're on the same page as Ryan about the role medical records and databases could play. This is a hot topic for Harvard professor David Cutler, one of Obama's top health-care advisers: "Greater use of information technology is one key to a more efficient health-care system," he says.

Ryan contends a combined CVS/Caremark is uniquely positioned to speed the evolution of America's health-care IT. [I sense a bit of hyperbole here.] His databases already show which patients are taking their pills. And CVS is investing millions to upgrade the systems, ultimately providing pharmacists with a patient's complete drug history, so they'll know whether a customer has stopped taking a medication entirely or is just buying it at a different chain.

Armed with that knowledge, CVS has begun an experiment. If a PBM patient has stopped taking his drugs, a CVS pharmacist may phone and remind him to order refills. This sounds intrusive. But as the public learns more about the medical and economic importance of compliance, sensitivities toward such tactics could change. "We have to find a way to help people think about this," says Ryan.

Money-Losers

In-store medical care will also help Ryan's cause. CVS has more than 500 "MinuteClinics" at its outlets staffed by nurse practitioners who both collect patients' information and motivate them to comply with treatment. There's a huge opportunity here: In 2005 there were nearly 99 million physician office visits for conditions considered to be "low-acuity," such as sore throats. Some CVS clinics are even on the campuses of Caremark's corporate clients, such as AT&T (T). That should help reduce absenteeism and lower overall health-care costs.

Trouble is, the clinics are money-losers for the first few years. They don't generate enough business to cover their fixed costs, according to the Deloitte Center for Health Solutions. Worse, the American Medical Assn. is hostile to in-store clinics, arguing that they provide subpar service. For those reasons, CVS slowed the rollout of clinics last year, though Ryan says he is still committed to the program [#msg-28970474].

Ryan is also gambling on a new project, Maintenance Choice, that offers the savings of mail-order prescriptions but lets patients pick up pills at CVS. Horizon Blue Cross Blue Shield of New Jersey is rolling out the program to its 3.6 million members. But David Snow, CEO of rival Medco Health Solutions, says CVS may lose the ability to garner mail-based discounts from drugmakers if it funnels customers through its retail stores. Ryan concedes there are concerns about Maintenance Choice and about Caremark's performance, which has trailed its peers since the merger.

Nevertheless, Ryan says the merger is central to his push into prescription compliance and clinics, which has expanded CVS's influence in the $3 trillion health-care arena. "The discussions we are having with General Electric and AT&T are ones we have never had before," he says. "Before, they looked at CVS as just another dispensing hub. Now, CVS is a partner in lowering health-care costs." When Obama calls for a roundtable on health-care reform, he predicts, "we'll be called."‹

[DewDiligence]

Generic Substitution Boosts Medco 2008 Profit

http://www.reuters.com/article/marketsNews/idINN2334478120090224

›Tue Feb 24, 2009 11:17am EST
By Lewis Krauskopf and Bill Berkrot

NEW YORK, Feb 24 (Reuters) - Medco Health Solutions Inc (MHS) reported a 32 percent rise in fourth-quarter earnings on Tuesday, helped by an increase in more-profitable generic drug sales and home delivery prescriptions.

The pharmacy benefit manager also stood by its 2009 profit outlook, and its shares rose as much as 4.1 percent before paring most of those gains.

"Guidance for the year was maintained," said William Blair & Co analyst John Kreger. "In this environment, that's a victory."

Net income rose to $274.4 million, or 54 cents per share, from $207.6 million, or 38 cents per share, a year earlier.

Excluding items, Medco had a profit of 59 cents, topping the analysts' average forecast by a penny, according to Reuters Estimates.

"Medco reported solid fourth-quarter results," JPMorgan analyst Lisa Gill wrote in a note to clients. "Prescription volume was above our expectation, which was reassuring given the concern over the impact of the economic environment."

There has been fear that patients hit hard by the recession would stop filling prescriptions or attempt to stretch medication by splitting pills or taking them less often than prescribed. But the difficult economy has helped Medco's prescription volume.

"What you find is the people know they need to take the drugs, but they become much more careful purchasers of those drugs and they gravitate to our mail service from retail and they gravitate to generic from brands to save money, which all works extremely well for us and our clients," Chief Executive David Snow said in an interview.

The company's total adjusted volume of prescriptions handled rose 4.3 percent to 198.1 million. Mail-order volume jumped 9.4 percent to a record 26.7 million.

Medco's rate of dispensing generic drugs rose 3.5 percentage points to 64.9 percent. [This compares with 68% at the Caremark division of CVS.]

Pharmacy benefit managers, or PBMs, administer prescription drug benefits for employers and health plans and operate large mail-order pharmacies.

Medco says it derives more than half its profit from delivering generic drugs by mail. Like other PBMs, it can take advantage of low prices from generic manufacturers and capture more profit by dispensing the drugs itself.

The Franklin Lakes, New Jersey-based company said it continued to expect 2009 earnings per share, excluding items, of $2.67 to $2.77, representing growth of 15 percent to 19 percent.

Fourth-quarter revenue rose about 14 percent to $13 billion, exceeding Wall Street estimates of $12.72 billion.

Medco said it had closed the year with more than $938 million in cash on its balance sheet, up 21 percent from 2007.

"Given the tight credit markets and uncertain economic times, we are creating our own liquidity, which will continue to fuel long-term shareholder returns," Chief Financial Officer Richard Rubino said in a statement.‹

[DewDiligence]

Medtronic Tells GPO to Shove It

[The question of whether healthcare middlemen add value or merely add costs to the healthcare system was broached in a thread about PBM’s instigated by rph_in_wi (e.g. #msg-28623699, #msg-35353328). Although the situation for medical devices bought by hospital GPO’s is not exactly the same as the situation for drugs bought by PBM’s, it is analogous, IMO. The bottom line is that I would not want to invest in any of these firms.]

http://online.wsj.com/article/SB10001424052748703409304576166903268690560.html

›FEBRUARY 26, 2011
By JON KAMP

Medtronic Inc.'s canceling of contracts negotiated by a group representing hospitals is an aggressive move, coming as the $200 billion U.S. medical-device industry defends itself against slumping product prices and tougher bargaining from hospitals.

Citing expected cost savings, Medtronic has canceled five contracts with Novation LLC, the largest group-purchasing organization, or GPO. Medtronic's move could escalate a battle between device makers trying to protect product prices and their leverage in negotiations, and GPOs trying to cut cost-saving deals for hospitals.

J.P. Morgan Chase & Co. analyst Michael Weinstein called it a "bold" move and a potential "watershed moment" that could eventually help the whole device sector, which pays fees to GPOs. He expects Medtronic also will walk away from other GPO deals.

"We believe other firms may well want to move in the same direction" when it comes to pricier, specialized products, William Blair analyst Ben Andrew said. Some already have, said Curtis Rooney, president of the Health Industry Group Purchasing Association, though he declined to disclose names.

Medtronic wouldn't comment about other GPOs but confirmed it canceled the Novation pacts.

"With an eye on removing costs from the healthcare system, Medtronic believes that we will be best able to address the varied needs of our customers by managing our business interactions and relationships locally instead of through Novation," the company said in a statement.

Other top GPOs include hospital-owned Premier Inc. and MedAssets Inc. MedAssets shares plunged 34% [!] to $14.06 Friday after a disappointing fourth-quarter release and multiple analyst downgrades.

Novation—owned by a network of nonprofit health organizations plus an alliance of academic medical centers and affiliated hospitals—announced the Medtronic contract cancellations late Thursday. The five contracts cover cardiovascular and orthopedic products.

Novation said its owners represent $2 billion in annual purchases for Medtronic, which compares with analysts expectations for nearly $16 billion in sales this fiscal year. Medtronic didn't confirm the contracts' value but said it already negotiates the "vast majority" of contracts locally, rather than through GPOs.

The contract cancellations highlight a long-running dispute between GPOs and the devices industry about whether GPOs add value or are middlemen that add costs, particularly fees that device makers pay GPOs to reach customers. In this case, Medtronic said it believes the move will ultimately take costs out of the health-care system; the company wouldn't confirm the fees it paid Novation, but Sanford Bernstein analyst Derrick Sung estimated them at $40 million to $60 million.

Novation claimed Medtronic's exit will likely raise costs for member hospitals by eliminating price protection. [Well, what else would you expect them to say?]. Device makers often require confidentiality agreements that block hospitals from disclosing product prices to third-party groups that aggregate data and shed light on the market. But Novation said its contracts guard against such clauses.

Mr. Rooney, president of the GPO association, said he thinks device makers leaving GPOs are trying to keep their prices secret. But Mark Leahey, president and chief executive of the Medical Device Manufacturers Association, had a different take.

"I think companies are probably getting fed up with having to pay these fees to GPOs, just for the privilege of selling to hospitals," he said.

Speaking on an earnings call Friday, Chief Executive Trevor Fetter at hospital operator Tenet Healthcare Corp. said manufacturers paying for GPOs has always appeared strange, and that customers paying the fees is an appropriate model. He said he wouldn't be "overly panicked" about Medtronic's contract cancelation, while adding "GPOs play an essential role in the supply chain."

Medtronic's move entails risks, because it could lose customers to competitors while alienating Novation members, analyst Mr. Sung said. Novation noted that 16 hospitals sent a letter to Medtronic Chief Executive Bill Hawkins stating "extreme disappointment" with the company's move. Medtronic said it doesn't expect any disruption in day-to-day operations with hospital customers.

But Medtronic's move could be a long-term positive, Mr. Sung said, in a devices industry feeling pressure on multiple fronts. The economic downturn and health-care overhaul rules have pressured hospitals, which are looking for ways to save on costs they pay for devices.

Hospitals have been steadily acquiring doctors' practices in a move that waters down device makers' ability to leverage relationships with product-choosing doctors. The threat of pricing pressure is an ever-present topic on device-industry earnings calls [no kidding].

Medtronic's move "could help to limit the influence of the GPO and thus shift some bargaining power away from the hospital and back to the device manufacturers," Mr. Sung said.‹

[DewDiligence]

WAG sells PBM business to CHSI for $525M:

http://finance.yahoo.com/news/Walgreen-Co-to-Sell-Pharmacy-bw-3978156901.html?x=0&.v=1

rph_in_wi: If you’re still reading this board, please opine. I'll bet you think this is a wise move by WAG.

[DewDiligence]

Express Scripts Acquires Medco for $29B in Cash+Stock

[Inasmuch as ESRX and MHS are two of three largest US PBMs (CVS Caremark is the other), this deal would seem to have antitrust issues. (The combined ESRX+MHS will be about twice as large as the PBM portion of CVS.) The nominal deal price is $71.36, a 28% premium to MHS’ closing price yesterday.

The PBM industry has been much discussed on this board during the past few years; in the view of rpi_in_wi, a pharmacist, PBMs are leeches that add no value to the healthcare system (#msg-35353328).]

http://online.wsj.com/article/SB10001424053111903461104576459013892952904.html

›JULY 21, 2011
By ANUPREETA DAS, GINA CHON and ANNA WILDE MATHEWS

Express Scripts Inc. agreed to buy Medco Health Solutions Inc. for $29.1 billion in cash and stock, a deal that combines two of the largest U.S. pharmacy-benefit managers at a time when health-care services companies are searching for new opportunities in the face of sweeping industry changes.

"The cost and quality of health care is a great concern to all Americans; this is the right deal at the right time for the right reasons," Express Scripts Chief Executive George Paz said.

Medco holders will receive $28.80 in cash and 0.81 Express Scripts shares for each share, valuing Medco at $71.36 a share, a 28% premium to Wednesday's close.

Pharmacy-benefit managers help employers and health-insurance companies administer prescription-drug benefits, process claims and control drug costs by securing discounts from pharmaceutical companies. Analysts say these companies are expected to benefit from the health-care overhaul law, which will bring millions of Americans under insurance coverage.

After the deal closes, Express Scripts shareholders are expected to own about 59% of the combined company and Medco shareholders will have the remainder.

The combined company will be based in St. Louis, and Mr. Paz will serve as chairman and CEO. The board will be expanded to include two current independent Medco directors. The deal is expected to have $1 billion in synergies.

There has already been consolidation in the pharmacy-benefit management industry. Express Scripts officials have publicly said in the last year that the company was on the hunt for acquisitions. In 2009, it acquired the prescription unit of WellPoint Inc., a health insurer, in a $4.7 billion deal.

In 2007, St. Louis-based Express Scripts lost out on acquiring rival Caremark Rx to drug store giant CVS Caremark Corp., which acquired Caremark for about $26 billion. At that time, Medco was seen as a possible next target for Express Scripts.

Express Scripts, which employs about 13,000 people, also distributes injectable biopharmaceutical products to patients or doctors, and provides cost-management and patient-care services.

Medco, spun out of drug giant Merck & Co. in 2003, provides clinical research and pharmacy services aimed at improving care while reducing health-care costs for private and public employers, union and government agencies. The company took in $66 billion in 2010 net revenue.

Separately, Express Scripts reported its second-quarter earnings climbed 15% to $334.2 million, or 66 cents a share, from $289.9 million, or 53 cents a share, a year earlier. Excluding items, earnings were 71 cents. Revenue edged up 0.6% to $11.36 billion. Analysts polled by Thomson Reuters were looking 71 cents and $11.33 billion. Gross margin improved to 7.1% from 6.9%, and the company reaffirmed its guidance for the year

Meanwhile, Medco reported its earnings fell 4% to $342.8 million, or 85 cents a share, from $356.9 million, or 77 cents a share, a year earlier. Excluding writedowns, earnings rose to 96 cents from 87 cents. Revenue jumped 4.1% to $17.07 billion. Analysts polled by Thomson Reuters had most recently forecast earnings of 94 cents a share on revenue of $17.07 billion. Gross margin was flat at 9.4%, though overhead expenses increased 12%. It affirmed its full-year guidance. Shares of both companies were inactive premarket.

The advisers for Express Scripts are Credit Suisse Group AG, Citigroup Inc. and law firm Skadden, Arps, Slate, Meagher & Flom, LLP. Medco is advised by J.P. Morgan Chase & Co, Lazard Ltd., and law firms Sullivan & Cromwell LLP and Dechert LLP.‹

[DewDiligence]

Corroborating your contention that the PBM industry ranks as one of the largest corporate scams of all time:

http://www.nytimes.com/2011/11/12/health/plan-would-delay-sales-of-generic-for-lipitor.html

[DewDiligence]

PBM-industry scam surfaces in consumer lawsuit against Mylan:

https://www.wsj.com/articles/mylan-hit-with-lawsuit-alleging-it-overcharged-epipen-patients-1491244133

The latest lawsuit alleged Mylan violated a federal racketeering statute and various states’ consumer-protection laws by raising the EpiPen’s list price to give a share of the proceeds to pharmacy-benefit managers, or PBMs, and ensure the device was available for sale to patients.

…The prospects for such a lawsuit are unclear, since the theory of illegality underlying the claim hasn’t been litigated before.

Worth following this one.

[DewDiligence]

Here’s_an_illustration_of_what’s_very_wrong_with PBM’s &existing_rebate_system:

https://www.fiercepharma.com/pharma/viatris-launches-two-versions-its-interchangeable-biosimilar-semglee-bid-to-tackle-pricing

VTRS is just one of many companies playing along with is pricing scheme.

[DewDiligence]

FTC (at long last) launches PBM inquiry:

https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-launches-inquiry-prescription-drug-middlemen-industry

This is bullish for drug/biotech investors!

[DewDiligence]

Congress_may_finally_be_doing_something_about PBMs. Maybe.

https://endpts.com/senate-committee-advances-pbm-bill-as-bipartisan-reforms-gain-traction/

[DewDiligence]

NYT cover story on PBMs—>old hat for readers of this board; check out the date of the message this post is replying to!

https://www.nytimes.com/2024/06/21/business/prescription-drug-costs-pbm.html