The big loser in the CVS-Aetna deal already seems pretty clear
- CVS's $69 billion deal to acquire Aetna is the latest in big healthcare consolidations - the entire industry is headed in the same direction.
- Unfortunately for Express Scripts, the biggest pharmacy benefit manager in the country, it's running out of companies to partner with.
- No one wants to be the odd man out.
The news of CVS's $69 billion deal to buy Aetna broke on Sunday night, and by Monday it was already clear who would lose out - the largest pharmacy benefit manager (PBM) in the country, Express Scripts.
PBMs are basically gatekeepers that manage the list of drugs an insurer will pay for. That's called a formulary. There are three big PBMs that control about 80% of the US market. CVS has one, UnitedHealth has one, and Express Scripts is the biggest. It's also the only stand alone PBM - that is to say, it doesn't also own an insurer or chain of retail pharmacies.
Therein lies the problem. The name of the game in healthcare right now is to get big and streamline. That is why, according to data from the Deals Intelligence team at Thomson Reuters, health-insurance mergers-and-acquisitions deals doubled in 2017 from the previous year, totaling $93.1 billion.
Express Scripts hasn't gotten in that game in a meaningful way, and analysts at Deutsche Bank told clients that its lack of participation could mean it ends up getting left in the dust.
The company "may be too dismissive of the increasing structural risks created by the vertical consolidation taking place across the supply chain," the note said. "We believe the company has been modestly losing market share since the Medco merger in 2012, and we do not believe the acquisition opportunities vaguely described above will be an acceptable longterm answer to insulate the company from the shifting competitive landscape, or meaningfully accelerate the company's near-term growth rate."
The aim with all of this is to create more of a one-stop-shop kind of healthcare company that is incentivized to keep costs low. This gives the company the ability to simplify the chain of entities that get paid when you are getting care - taking hands out of the equation.
This is how the chain looks now:
And there's another giant coming. The reality that Amazon - which is reportedly in talks to buy a PBM - is entering the marketplace has companies spooked. At first Express Scripts said it would "stand well" against any competition from Amazon. Then last week the CEO of Express Scripts said the company "would be open" to striking a deal with Amazon.
In that case, though, Deutsche Bank thinks Express Scripts would still end up losing.
"To the extent a company like Amazon or any other retailer could establish themselves as a safe efficient provider in pharmacy networks, then we see a situation where ESRX negotiates with the online player similar to other retail channel partnersm," analysts wrote. "We do not believe this is a great scenario for ESRX, as over-time, it could pose a threat to ESRX's profitable mail-order business, but we would offer that some of the lost mail-order could be mitigated by the products and services..."