Express Scripts Inc.: A prescription for growth
St. Louis Post-Dispatch
June 11, 2010
by Jim Doyle
As one of the nation's leading pharmacy benefit managers, Express Scripts Inc. is riding a huge wave of commercial and public interest over how best to prescribe and distribute everyday medicines.
The company is now the nation's third-largest pharmacy benefit manager (PBM) in terms of number of prescriptions handled. And for the first time, Express Scripts landed on the Fortune 100 list of the fastest growing publicly traded companies in the United States.
"We are focused on our patients," said George Paz, the company's president and chief executive. "The cheapest drugs is where we make our profits."
Buoyed by the increased demand for its services, Express Scripts was the Post-Dispatch's top performing company in the St. Louis metropolitan area in 2009. The company posted revenue of $24.7 billion in 2009, up from $22 billion in 2008. Net income rose to $828 million from $776 million.
It proved to be a heady year for Express Scripts. The company closed its $4.675 billion acquisition of WellPoint's NextRx subsidiary, a national provider of pharmacy benefits management services.
"As we grew, our (drug) buying power was increased significantly," said Paz, whose compensation, including bonuses and other incentives, totaled $10.6 million in 2009.
Still, Express Scripts faces distinct challenges in 2010 and beyond. Health reform initiatives -- including proposals to expose the hidden costs in the pharmaceutical drug supply chain -- could complicate Express Scripts' position as a go-between for pharmaceutical companies, drugstores and consumers. There is continued pressure to meet demands for lower drug prices. And direct competitors Medco Health Solutions Inc., the world's largest PBM, and CVS Caremark remain in play.
Express Scripts approaches such challenges with almost evangelical zeal, touting what its marketing gurus call "consumerology" -- practical tools to help patients obtain medicines at low cost and to adhere to their drug therapy schedules.
But some pharmacists have referred to the company as "the big bad wolf" because, they say, it has helped drive smaller, family-owned pharmacies out of business.
"They control the contract, and pharmacists have no leverage," said Ron Fitzwater, chief executive of the Missouri Pharmacy Association. "It's basically a take-it-or-leave-it contract. It impacts what pharmacists are able to charge for their services. It's not a true marketplace when you don't have the ability to negotiate."
Express Scripts' Paz countered that his company simply puts rules in place to drive retail pharmacies to the lowest-cost drugs. "They don't like our influence because what we do cuts back on their revenues and profits," said Paz, who lives in Clayton.
The company acts as a broker for pharmacy chains and employers to buy prescription drugs at lower rates. But it also has opened a direct mail order service to compete with retail pharmacies.
Express Scripts officials say that fewer errors are made when prescriptions are filled by a mail-order service rather than a retail pharmacy, and that patients are more likely to adhere to their drug therapies if they receive their refills in the mail. But many pharmacists contend that one-on-one personal interaction with patients is a key to better health.
Scott Meyers, executive vice president of the Illinois Council of Health-System Pharmacists, said community pharmacies and mail-order services should work together.
"Unfortunately, I don't believe it's happening very much because the mail-order folks don't believe they need to have a presence in the community."
WALL STREET
Wall Street analysts are gung ho about Express Scripts' financial prospects, though some say its stock price may be overvalued.
"I think they're extremely well positioned," said analyst Jeff Jonas at Gabelli & Co. Inc., an institutional research and brokerage firm in Rye, N.Y. "I think they'll have very little impact from health care reform -- definitely no regulation, no taxes and none of the other negatives. They could get extra volume in 2014 when they start covering the extra 32 million Americans."
Arthur Henderson, an analyst at Jefferies & Co., an investment bank in Nashville, Tenn., said Express Scripts' specialty products division, which handles the delivery of new biotech liquid drugs, is well-positioned to capture a healthy share of this growing market.
"These guys are a solution to the problem rather than a contributor to the problem of rising health care costs," Henderson said.
But the playing field may be changing.
In 2009, some companies and drugstores such as Walgreens began teaming up to negotiate directly with pharmaceutical companies in hopes of achieving lower drug prices -- without paying middleman costs to a pharmacy benefits manager.
Retail pharmacies are also moving ahead with programs that automatically refill prescriptions without a phone call from the patient.
Founded in 1986, Express Scripts became a publicly traded company in 1992 and blossomed as a benefits manager in the last decade. But the company has taken some surprising detours.
In 2007, an Express Scripts subsidiary, Specialty Distribution Services Inc., agreed to pay a $10.5 million fine for illegally distributing human growth hormone to athletes and entertainers. By law, the growth hormone was approved solely for children with certain categories of growth failure.
Paz said the subsidiary was filling doctor's prescriptions for patients who turned out to be athletes. "We weren't complicit in trying to undermine the rules, but in hindsight we could've been more diligent in calling the doctors to check on these prescriptions," he said.
In 2008, Express Scripts agreed to pay $9.3 million to 28 states and $200,000 in reimbursement to consumers to settle lawsuits that accused the company of deceptive business practices in allegedly overstating the economic benefits to consumers of switching to certain drugs.
Paz, a former accountant, defended his company's business practices and said it would have been too costly to litigate against all those states. He noted other activities that he says demonstrates Express Scripts' high values.
The company's 2009 Drug Trend Report, for example, identified $163 billion in pharmacy-related waste in America that is related to behavioral factors. This money could be saved, Paz said, if patients took their medicines as prescribed by doctors, chose generic drugs and other low-cost alternatives, and had their prescriptions delivered by mail.
LOOKING AHEAD
In 2009, the overall size of Express Scripts' work force grew to more than 14,000 (with about 4,000 in the St. Louis area), making it one of the rare local companies that continued to hire during the deep recession. But like other firms in the recession, the company also has shed workers. In April, it reportedly laid off at least 50 employees from its client services and other divisions.
The company recently opened its mail-order distribution plant, receiving $7 million in incentives and tax breaks from the state of Missouri and St. Louis County for building the facility in the NorthPark business park, across Interstate 70 from its headquarters on the campus of the University of Missouri-St. Louis.
Express Scripts would like to extend its influence further. Plans are in the works to put information kiosks in doctor's offices to advise patients about cheaper alternatives to brand-name drugs.
"Our whole model is switching people to lower-cost drugs," Paz said. "The more money my shareholders make, the more money I make."
