Pharmacy Industry News: Medco May Seek Acquisition With Biggest Contract Imperiled
Medco May Seek Acquisition With Biggest Contract Imperiled
Medco Health Solutions Inc. (MHS), the pharmacy benefits manager that lost $3.5 billion in contracts since March, may seek acquisitions to make up for lost revenue if its biggest remaining client fails to re-sign this year.
The $11 billion contract with UnitedHealth Group Inc. (UNH), representing about 17 percent of Medco’s business, expires after 2012. The insurer is reviewing the agreement and will decide whether to renew this year, UnitedHealth Chief Executive Officer Stephen Hemsley said on June 1. The Minnetonka, Minnesota-based company is leaning toward terminating the contract and handling the work with its in-house unit, said Ana Gupte, an analyst at Sanford C. Bernstein & Co. in New York.
If so, Franklin Lakes, New Jersey-based Medco will likely seek acquisitions to help make up for the lost sales by looking to purchase another pharmacy manager or diversifying beyond its core business of buying, dispensing and overseeing prescriptions for companies, analysts said.
“This is an industry where scale matters, and the loss of UnitedHealth will increase the pressure on Medco executives to fill in the revenue gap it creates,” said Helene Wolk, an analyst also at Sanford Bernstein, in a telephone interview. A potential target may be Cigna Corp. (CI)’s pharmacy unit, which the insurer tried to sell two years ago, she said.
The loss of UnitedHealth, with its 20 million members, may drop Medco from the biggest pharmacy benefit manager by revenue to the smallest, behind Woonsocket, Rhode Island-based CVS Caremark Corp. (CVS) and Express Scripts Inc. (ESRX), of St. Louis, Wolk said. Sanford Bernstein has an “outperform” rating on Medco with a $66 target price.
Share Performance
Medco rose 15 cents to $56.92 in New York Stock Exchange composite trading at 9:47 a.m. The shares had dropped 12 percent since May 26, the day before the company announced the loss of a $3 billion contract covering 4 million U.S. government workers and 9.8 million mail-order prescriptions. Medco in March lost the renewal of a $500 million contract with the California Public Employees Retirement System.
The federal-employee contract, lost to CVS, represents less than 10 percent of Medco’s estimated earnings and won’t affect 2011 results, Jennifer Luddy, a company spokeswoman, said.
Medco is “confident in our differentiated services and competitive positioning in the marketplace,” Luddy said in an e-mail. “Our 2011 client retention rate remains at over 99 percent, a result of our focus on superior client service and the value that we consistently deliver through our advanced clinical pharmacy model.”
‘Explore Opportunities’
While Luddy declined to comment specifically on whether Medco may seek acquisitions to make up for lost contracts, she said “we are open to and explore opportunities that make strategic sense.”
UnitedHealth’s contract generates about 8 percent of Medco’s earnings per share, Bernstein’s Wolk said.
“We expect UnitedHealth is unlikely to renew that contract for 2013, bringing some or even all PBM activity in-house,” Gupte, also from Bernstein, wrote in a June 2 note to clients.
UnitedHealth has a unit that manages pharmacy benefits; taking that business in-house may increase its size by 67 percent, Bernstein’s Wolk said. Investments made in the pharmacy unit, called Optum Rx, are sufficient to handle the Medco business, UnitedHealth’s Hemsley said April 21 during an earnings conference call.
Clear Signals
“I don’t know how the signals could be any clearer,” said Art Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee, in a telephone interview. “United wants to take the business in-house and Medco will have to be very competitive in price to maintain any of it.”
To make up for revenue losses, Medco may look to diversify beyond pharmacy benefits management, as it did Aug. 16 when it agreed to buy United BioSource Corp. for $730 million, said Ross Muken, an analyst at Deutsche Bank in New York.
United BioSource, which tests drugs and devices after they are approved by regulators, “was a completely new offering,” Muken said in a telephone interview. “I think certainly things like that will be highly interesting.”
Competition intensified among pharmacy benefits managers after Express Scripts moved forward with integrating Indianapolis-based WellPoint Inc. (WLP)’s pharmacy benefits unit with 25 million members. CVS, in the past year, grabbed a contract with Capital Blue Cross of Pennsylvania from Express Scripts and the federal workers plan from Medco.
Changing Strategy
“Historically, Medco has never been a fan of just buying market share,” Eugene Goldenberg, an analyst at BB&T Capital Markets in New York, said in a telephone interview. “But over the last six to nine months, we have seen management’s tone change” toward acquiring another pharmacy benefits manager.
The number of potential targets dwindled after Hartford, Connecticut-based Aetna Inc. (AET) gave a 12-year, $9.5 billion contract to CVS last July and UnitedHealth began investing in its pharmacy benefits unit.
Among those left on the market is Philadelphia-based Cigna’s pharmacy benefits unit with 6.2 million members as of March 31; Prime Therapeutics LLC in St. Paul, Minnesota, with about 17 million members; and MedImpact Healthcare Systems Inc. in San Diego with about 32 million participants, said Jefferies’s Henderson. Of the three, Cigna offers the most profitable business, he said.
Asked about a potential sale, Lindsay Shearer, a Cigna spokeswoman, said the insurer sees “pharmacy as a key component of Cigna’s integrated approach to health care.”
“The business has delivered strong results for us,” Shearer said in an e-mail. “At the same time, we are always evaluating opportunities to maximize its value for our customers and shareholders.”
Prime Therapeutics said it has been approached by potential buyers though it isn’t looking to sell the business. “We are very pleased with where we stand as an important player in the PBM market,” said Matt Yordy, senior vice president for business development.
Taylor Heringer, a spokeswoman for MedImpact, didn’t respond to requests for comment.
Fresno’s Renge’s Pharmacy closes its doors Wednesday
In Fresno, where you almost can’t throw a rock without hitting a major chain pharmacy, Renge’s Pharmacy has been one of the last of a dying breed – an independent neighborhood drug store. And despite being in Chinatown, a neighborhood that has seen better days, owner/pharmacist Mel Renge has endured while other businesses have come and gone.
But after being battered by the recession and shrinking insurance payments for prescription drugs, Renge has decided to close the pharmacy that his father founded in 1951.
Wednesday will be the last day of business for Renge’s on F Street between Kern and Inyo streets. And customers – many of whom rely on Renge and his staff to patiently explain prescriptions or allow them to pay when they can – are in a state of shock.
Renge – whose late father Nobuo Renge started the business on California Avenue – is selling out to industry giant CVS. CVS will transfer patient prescription records to its nearby store on the Fulton Mall, where Renge and three of his four employees will work.
“It was a really tough decision,” said Renge, 61. “We’ve got two or three generations of families doing business with us.”
Renge’s biggest concern is for the denizens of Chinatown – senior citizens, the poor, the homeless and other special-needs customers. For years, Renge has gone to great lengths to help those who live in the neighborhood, extending credit and offering delivery, even filling prescriptions for the homeless at the nearby Poverello House.
“My dad started the whole philosophy of treating people with dignity and just giving them the best level of care that we can,” Renge said Monday as a steady stream of customers came to the store.
Over the past few years, however, it’s been more difficult to provide those services and still keep the business afloat.
“Obviously, like everyone else in this economic downturn, we’ve been hurt,” he said. “We were surviving, but the Medicare reimbursement levels kept decreasing every year.” Renge said he anticipated that MediCal, the state’s low-income insurance program, would probably also drop significantly this year.
CVS wasn’t the first chain pharmacy company to approach him in recent years, Renge said.
“As tough as it was, we’ve been just hem-hawing for a couple of years, but it just wasn’t the right time,” he said. “Looking at the big picture, this is something that was probably inevitable, whether it be this year, or next year or five years from now.”
CVS has committed to continue serving customers who are on credit terms and to offer delivery, which Renge said made his decision to sell somewhat easier.
“It’s kind of a win-win for the patients and for us as well,” he said.
Customer Mary Murray, who brought in a prescription Monday, was near tears when a clerk told her the store was closing. Renge quickly stepped from behind his counter to offer her a comforting hug.
“It’s going to be OK,” he told her. “We’re going to be close by.”
Murray said she drives past other pharmacies nearer her east-central Fresno home to get to Renge’s. The closing, she said, is “sad because they take such special care of people.”
Maria Sanabria has shopped at the pharmacy for more than 50 years, dating back to Nobuo Renge’s original location on California Avenue. “I knew [Mel] when he was a little boy and his father and mother ran the store,” Sanabria said. “They were good people.”
But she was fearful when she learned about the closure. “I thought, ‘Oh, my God, what am I going to do?’ because these people take care of me real good,” Sanabria said. “When I don’t have the money to pay, they give me the medicine and let me pay when I can.
“But then he told me not to worry, that everything will be the same.”
Dr. Marc Lasher, who used to operate the Chinatown Family Medical Clinic from the rear of Renge’s building, said that kind of service will be missed the most.
“Mel has taken care of people … whether they are illiterate or because of mental health,” Lasher said. “He’s been the safety net in our society right there on F Street. He wouldn’t just let those people slip through.”
Lasher added that Renge often filled prescriptions at little or no cost to homeless patients from the Holy Cross Clinic at the Poverello House. “He’s been a guardian angel to many, many people, including us when we had our practice there,” the doctor said.
City redevelopment officials said Renge’s closure represents what is happening to many small retailers, including independent pharmacies, across the country.
“It’s sad to see a community business closing, but it’s inevitable in a lot of business sectors because of how business is evolving,” said Terry Cox, a redevelopment manager whose responsibility includes the Chinatown district.
Officials said they believe Renge’s building will eventually become home to another business – and probably one that, like Renge’s, will be locally owned.
“It’s an unfortunate rite of passage,” Cox said. “But we are seeing new interest and investment in Chinatown. Positive things are happening.”
Splitting the Difference: Workshops Highlight Industry, Medical Relationships
Two conferences in coming weeks are featuring starkly different views on the (a) harms or (b) benefits of interactions between the pharmaceutical industry and the doctors, researchers and journal editors who shape medical care.
Georgetown University is sponsoring its second “PharmedOut” conference on June 16 and 17 with a lineup of some of the industry’s leading and best-informed critics, including Dr. Marcia Angell, former editor-in-chief of the New England Journal of Medicine and a senior lecturer at Harvard Medical School.
Meanwhile, on July 22, a nonprofit group called the Association of Clinical Researchers and Educators, or A.C.R.E., is holding its second conference since its founding in 2009, to explain the reasons to support collaborations between the industry and doctors.
At next week’s conference, Dr. Angell, who discusses reasons for the explosion of mental health drugs in the current issue of The New York Review of Books, believes many conflicts-of-interest should be banned, not just disclosed.
The Georgetown conference also features Dr. Carl Elliott, the University of Minnesota professor and bioethicist who is under attack at his own university for raising questions about a medical experiment there, and Dr. Virginia Barbour, chief editor of PLoS Medicine, an “open-access journal” and free Web site from the Public Library of Science.
The organizer of the Georgetown conference, Dr. Adriane Fugh-Berman, a Georgetown University associate medical professor, says it will cover some of the newer issues emerging in medical conflicts-of-interest. These include the role of drug company employees known as medical-science liaisons and the influences brought to bear on pharmacy benefit managers.
The second conference was co-founded by Dr. Thomas P. Stossel, a professor at Harvard Medical School and director of translational medicine at Brigham and Women’s Hospital. He has seen himself as a sometimes lonely voice to speak in favor of industry collaborations with researchers and medical schools.
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Dr. Stossel argues that the financial aid and research interactions benefit patients and advance science. He will lead a panel called, “Academia/Industry Collaboration: Why is it under attack by politicians, deans and the media?”
Other A.C.R.E. panels will discuss what industry, patients and medical students should do to push back against the type of thinking generally represented at the Georgetown conference. Dr. Michael A. Weber, a professor at SUNY Downstate Medical Center College of Medicine and a former president of the American Society of Hypertension, talks about A.C.R.E.’s upcoming plans.