Another Hidden Health Care Industry Is Let Out of the Bag
By Rob Fannon, editor, The Medical Investor
March 30, 2007
Last Friday, shareholders of Caremark approved a $27 billion acquisition bid by drugstore giant CVS Corporation (CVS).
The final price tag for Caremark was determined after a three-round bidding battle with another major player in the sector, Express Scripts (ESRX).
CVS is a drugstore chain. It fills and sells prescription drugs. Caremark is a company that manages prescriptions. Essentially, it directs which drugs get filled and for how much. Combining the two companies will put both functions under one roof and, in one fell swoop, change the drugstore landscape.
Everyone knows about drugstores. But not everyone knows what a pharmacy benefit management organization, or PBM, is.
PBMs are third-party administrators of drug benefit plans offered by private employers, typically large institutions that don't want to be bothered with the intricacies of getting the cheapest drugs to employees.
PBMs develop formularies, or lists of drugs available for employees to choose from. These companies are major market movers for the drug industry, wielding a large influence on exactly which drugs make the list and have the highest prescription rates. Nearly 100 million Americans rely on the three biggest PBMs in some form to get their drugs.
As such, PBMs have good leverage to negotiate bulk sales contracts with Big Pharma on their clients' behalf. These cost savings are passed along to employers and patients. But, like all middlemen, PBMs take its cut too...
The top three PBM players raked in a total net profit of $1.9 billion last year.
It will be interesting to see exactly how the new Caremark/CVS business will fare after the merger. The new entity will create a vertically integrated, or "one-stop shop," for medicine. The PBM arm of the business (Caremark) will direct what drugs get shuffled down the drugstore arm of the business (CVS).
With Caremark no longer an independent company, Express Scripts and MedcoHealth Solutions (MHS) are the biggest pure-play PBM investments. However, I've been researching several smaller niche companies in the sector with new approaches to the drug benefit market. I'll be recommending one or more of these businesses to my Medical Investor readers in the near future.
It takes time to peel back the layers of this country's messy health care industry. But with patience and effort, there are plenty of outstanding opportunities lurking behind the scenes of the medical machine.
Good investing,
Rob Fannon
Editor, The Medical Investor
