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Express Scripts stands alone in the pharma chain after CVS-Aetna deal

As CVS Health Corp. and Aetna Inc. forge ahead on a $69 billion deal to create a one-stop medical management company, stand-alone pharmacy benefit manager Express Scripts Holding Co. is conspicuously independent among hybrid healthcare providers.

If the CVS-Aetna tie-up makes it through shareholder and regulatory approval, the company would link up nearly every step of the pharmaceutical supply chain, from the negotiations with drugmakers through insurance coverage and retail sales.

The closest current peer would be UnitedHealth Group Inc., a healthcare insurance provider with the in-house pharmacy benefit manager OptumRx but no retail pharmacy unit. OptumRx managed 65 million people in 2016, compared to CVS' 90 million through its Caremark PBM unit and Express Scripts' 83 million, making the three the largest PBMs both in terms of revenue and customer base.

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This leaves Express Scripts as the only stand-alone pharmacy benefit manager among the big three. The company's own recent deals — buying benefits management company eviCore for $3.6 billion and selling its United BioSource unit to a private equity company — would be eclipsed.

Yet these deals could also signal bigger moves in Express Script's future, particularly as it embarks on a restructuring plan of up to $650 million focused on automation and new business opportunities.

Express Scripts managed 1.4 billion prescriptions in 2016, according to its annual report, significantly lagging behind CVS' self-reported 2.4 billion prescriptions during the year across its extensive pharmacy base. Mail-order prescriptions are largely Express Scripts' corner of the market, but this could also be under threat if Amazon.com Inc. enters the ring, as reports have suggested. On the sidelines of the recent Forbes Healthcare Summit, Express Scripts CEO Tim Wentworth said he could see Amazon as a potential partner.

Targeting smaller health providers

If CVS and Aetna combine, Express Scripts will become the largest PBM not owned by a health insurer, Adam Fein, president of Pembroke Consulting Inc. and CEO of the Drug Channels Institute, said in an email.

"That's a risky point of differentiation in a world migrating toward more integrated pharmacy and medical benefits," Fein said. "However, a combined CVS-Aetna business will have perceived or actual conflicts with other health plans. This could create an opportunity for Express Scripts to peel clients away from the CVS-Aetna PBM businesses."

One point of contention could be the IngenioRx, the PBM that Anthem Inc. is launching as its in-house option after its contract with Express Scripts ends in 2020. CVS' Caremark is signed on to manage the PBM's processing and prescriptions through 2024.

In a Dec. 4 analyst call on the Aetna deal, CVS CEO, President and Director Larry Merlo said the announcement had no bearing on the company's ability to move forward with IngenioRx and that the planning process for the new PBM is "well underway."

Other big CVS contracts with managed care organizations, or MCOs, include a $4.21 billion agreement with Health Net Inc. expiring at the end of 2019, and a $2.90 billion contract with Molina Healthcare Inc. ending mid-2018, according to an April report by Barclays analysts.

This could be an opportunity for Express Scripts, RBC Capital analyst George Hill said in an interview.

"I think they have a very credible business model going forward, being the benefits provider-at-scale of choice to every MCO not named UnitedHealth, Aetna or Anthem," Hill said.

Smaller and midsize MCOs are not necessarily keen to work with PBMs linked up to larger ones; Hill noted that OptumRx's footprint with this market is not as big as the current footprint of either CVS or Express Script.

The Aetna purchase is unlikely to boost CVS' own numbers, as the insurer is already CVS' largest customer, according to the Barclays report. The Aetna contract, valued at $18.7 billion and set to expire in 2022, represents about 14.5% of CVS' revenues, the analysts said.

As for IngenioRx, CVS' contract should be safe in the meantime.

"I expect given the way that the CVS-Aetna deal transpired, that Anthem probably had an idea that CVS was pursuing a strategy like this," Hill said. "I think Anthem views the CVS solution as a short-term one on the path to integration, not the long-term answer."