Express Scripts' Potential Breakup With Anthem, Explained

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Express Scripts Holding Company (NASDAQ:ESRX) shares are bouncing back by 2.9 percent Wednesday after plummeting 10.7 percent Tuesday on news it is likely losing its largest customer, Anthem Inc (NYSE:ANTM).

On Monday after the market close, Express issued a press release suggesting Anthem would not be renewing its contract with Express beyond 2019.

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CEO Tim Wentworth said Express management can't understand why Anthem would turn its back on the unique cost savings Express provides, but he reassured investors Express’ core business growth is well-positioned even without Anthem.

Executive Perspective

“It is difficult for us to understand why Anthem has not recognized the potential value which could be brought forth by engaging in meaningful discussions regarding a mutually beneficial pricing arrangement for the remaining term of our contract and beyond,” Wentworth said.

Express and Anthem have been at odds over Express’ pricing since Anthem sued Express back in March 2016, prompting a counter-suit from Express shortly thereafter. Anthem claims Express owes the company $3 billion in cost annual cost savings, but Wentworth said it simply doesn’t have $3 billion to offer.

“As we stated and is now clearly evidence, we do not have $3 billion in savings to give Anthem from pricing concessions alone,” he explained after revealing Express earned just $3.4 billion in total net income.

Wentworth said that Express offered Anthem up to $3 billion in total cost savings through 2019 ($1 billion annually), but Anthem indicated it intends to move on after its current contract expires in 2019.

Express shares plummeted on the prospects of the company losing its largest client but bounced back Wednesday after Anthem appeared to soften its tone.

“We’ve not made a final decision with respect to any vendor,” Anthem CEO Joe Swedish said Wednesday. “We’ve not ruled anyone in or out. I think that covers the entire spectrum of vendor possibilities, and I’ll leave it at that.”

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Analyst Weighs In

In addition to Express Scripts, CVS Health Corp (NYSE:CVS) and UnitedHealth Group Inc (NYSE:UNH) dominate the pharmacy benefit manager business. PBMs handle drug pricing negotiations among insurers, employers and drug manufacturers.

If Anthem chooses to part ways with Express, Leerink analyst Ana Gupte sees CVS and Prime Therapeutics as the most likely replacement. Gupte also says Optum is in the running as well.

According to Gupte, Anthem also has a third potential option: a merger with Humana Inc (NYSE:HUM) after its CIGNA Corporation (NYSE:CI) appeal is officially dead. Together Humana and Anthem could create their own in-house PBM. Regardless, Gupte is bullish on Anthem stock.

“We remain bullish on ANTM at a PT of $200 and see $2+ in EPS upside just from PBM re-contracting commencing [in] 2020 with multiple expansion after the winner is chosen and contract terms are disclosed,” Gupte explained.

Amid the public drama of their contract dispute, Anthem shares are now up 23.2 percent in 2017, while Express Scripts shares are down 10.2 percent.