No Rx… for Lost Business, Poor Management, Expensive Mistakes

Express Scripts – the company we love to hate – came out with an announcement today that sent the stock plunging in afterhours trading. The company announced that it’s unlikely that their largest customer, Anthem, will renew their contract for pharmacy benefits management service after it runs out in 2019.

Anthem represents about 15% of ESRX’s business and it is a major blow. In Sickness and Wealth has held this for a time and it’s constantly testing our patience…. which is about to run out. Selling at the lows is not something we are in a habit of doing, and we may give it some time to recover back into the 60s. The stock was trading around $67 per share at the close of the NYSE, but in afterhours trading, plunged to $57 a share where its trading actively.

Anthem’s business may end up with one of ESRX’s competitors (CVS Health or United Health’s Optum). Since we own United Health as well, we will be partially compensated should Anthem go with Optum. While Anthem has not made a formal announcement, it looks like ESRX is throwing in the towel and not making any additional price concessions. Anthem was looking for $1 billion a year in cost savings… which ESRX made to some extent…. but in the end, the deal appears to be terminating.

Without knowing all the facts, it’s difficult to form a totally informed judgement, but in the general opinion of most of the business world, you simply do not let your largest customer walk out the door. We believe senior management should be held totally accountable for this loss. If they did in fact do everything to save the deal, then they should remain; if not, they should be gone. They have done nothing for shareholders in the past several years. In fact, they have erased shareholder value at an alarming rate. Most of the In Sickness and Wealth personal portfolio is solidly profitable. We would expect this kind of price action from a volatile biotech…. not from one of the largest Pharmacy Benefit Managers in the world. We detest losses and this one hurts because we thought seriously of dumping this company long ago, primarily because of management issues along the way. We will see how it behaves over the next few trading days, but shame on ESRX management for allowing this to happen. We hope they come to their senses and get back to the negotiating table.

The only thing making this blow a little bit less forceful is that we wrote options on ESRX before we started this publication, so we offset about 35% of the losses. This stock traded in the high 80s not too long ago…. there is no excuse for this.

And in another disappointment, Becton Dickinson, another ISAW holding decided to go shopping for a medical device company. They spent $24 BILLION on CR Bard. While we will have more to say on that later, we wonder what possessed management to pay a premium price for a company they could have bought long ago, much cheaper. Why do they have to buy at historic highs? Granted, Becton Dickinson has many mature business lines, but $24 billion? BDX’s management has made very good decisions over the long run…. we hope this one proves good as well.

 

Stay tuned.

Dave Lerman and Jodie Warner

Leave a Reply