Express Scripts reported consolidated net income of $877.3 million in its second quarter 2018 earnings report Wednesday, 9.4% higher than the same quarter a year ago.
As a result, the St. Louis-based pharmacy benefit manager increased its core earnings guidance for the year to a range of $5.3 and $5.4 billion, representing growth of 8% over 2017.
Adjusted claims were at 337.9 million, down 3.5% from second quarter 2017 due to losses of “certain public sector clients” and the loss of Anthem, its biggest client. Unfazed, Express Scripts upped its expected 2019 client retention rate for the 2018 selling season from a range of 96% to 98% to a range of 97.5% to 98.5%.
Despite the loss of Anthem in October, Express Scripts still fills 1.4 billion prescriptions annually, rivaled only by CVS’s Caremark and UnitedHealth Group’s OptumRx.
The growing PBM is in the midst of finalizing a $67 billion merger agreement with Cigna. The two entered talks after regulators blocked Cigna's bid to buy fellow insurer Anthem. The merger is expected to be completed by the end of the year. Express Scripts is holding a stockholder meeting Aug. 24 to discuss and vote on the adoption of the merger.
However, the meeting could have fireworks, as activist-investor Carl Icahn, who owns less than 5% of Cigna, is reportedly planning to attempt to convince other shareholders to oppose the PBM acquisition.
Icahn apparently believes Cigna is spending too much money for a deal which will leave it saddled with all the policy problems a PBM brings in the current climate (along with tension and worry around competing with e-commerce giant Amazon’s looming presence in the healthcare industry).
The influential shareholder’s opposition is not the first sign of trouble for the merger, which has faced disapproving investors since its announcement in March.
Express Scripts attributed the Q2 boost in income to core PBM gross profit growth, the inclusion of eviCore results and reduced income tax expense. It forecast 2-3% claims growth for next year.
The report comes amid a national debate over the role of PBMs, spurred in part by drugmakers taking issue with the rebates they extract from the industry. The Trump administration has also called out PBMs and seems interested in curbing the rebates, as well as overhauling safe harbor protections that shield PBMs from anti-kickback lawsuits.
PBMs contend they play a central role in mediating drug costs and negotiating pharmaceutical companies down on price tags, but other players in the industry paint them as middlemen who, by leveraging their power over drug formularies, pocket large sums in rebates with each transaction.
According to a Berkeley Research Group study, these retrospective rebates accounted for 31% of gross expenditures on branded pharmaceuticals (a whopping $106.4 billion) in 2015.
It's all putting the industry on defense, citing conflicting research and questioning the government's legal authority to limit safe harbors through rulemaking.
Express Scripts CEO Tim Wentworth alluded to the challenge in the results report, saying its clients are seeing a “reduction in their pharmacy bill, with Express Scripts passing approximately 95% of all pharmaceutical purchase discounts, price reductions and rebates” back to them.
“The result has helped our clients achieve a record low drug trend of 1.1% for the first half of 2018,” he said.
Wentworth also cited the company's participation in dialogue around the Trump administration’s Drug Pricing Blueprint and noted that, if Medicare Part D rebates were phased out, it would not have a “material impact” on earnings — but list prices of brand drugs would need to be lowered to offset the value of rebates “no longer going back to members and clients.”
“We are ready for the challenge,” Wentworth continued, “should the Administration reform Medicare Part B to either provide an alternative to buy-and-bill or implement proven PBM tools.”