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Anthem breaks with Express Scripts, to start own drug plan with CVS

October 18, 2017

Indianapolis-based insurer Anthem Inc. said it will set up its own pharmacy benefits management unit, signaling a final break with Express Scripts Holding Co. after the health insurer accused Express of overcharging it by billions of dollars.

The move means that Express Scripts will not only lose its biggest client, it will have a new rival. Anthem plans to use the new unit, called IngenioRx, to grow its own business with a “full suite” of services it will offer to potential customers, it said in a statement Wednesday.

Anthem said it had also secured a five-year agreement from CVS Health Corp.Express Scripts’ biggest competitorthat goes into effect after its current contract with Express Scripts expires at the end of 2019.

Shares in Anthem rose 4.2 percent Wednesday morning, to $195.20 each.

Terms of the deal were not disclosed.

Pharmacy benefit managers, or PBMs, run prescription drug plans for employers, government agencies and insurers, among other clients. They use their large purchasing power to negotiate prices.

Anthem provides health coverage to more than 40 million people in several states, including big markets like New York and California. The insurer said its PBM will serve its health plans as well as customers outside Anthem. CVS Health, based in Woonsocket, Rhode Island, will process claims and provide other services. The companies agreed to a five-year deal.

Anthem had left the PBM business in 2009, when it sold its operations to Express Scripts Holding Co. for about $4.7 billion. The two companies started working together, but their relationship soured as they started squabbling publicly over prices.

That fighting led to a lawsuit filed by Anthem last year. The insurer said it wanted to recover damages for drug prices that are higher than competitive benchmarks. Express Scripts said the case had no merit.

Shares of Express Scripts slipped back in April when it said Anthem, its biggest customer, didn't plan to extend its contract after the deal expires in 2019.

Express Scripts announced last week that it had agreed to pay $3.6 billion to acquire closely held EviCore Healthcare, a company that preapproves scans and other costly medical tests for health plans.

The pharmacy benefit management business has been under pressure from all sides. Lawmakers in Washington, D.C., have been asking how the PBMswhich act as middlemen administering complex drug contracts and negotiating pricesmake their profits. Drugmakers have blamed PBMs for consumer outrage over the high cost of medicine in the United States. And analysts have speculated that Amazon.com Inc. is eyeing the industry as ripe for disruption.

Express Scripts said it has already been taking steps to mitigate the fallout by Anthem’s exit. The news is “not unexpected, but is disappointing,” said Brian Henry, an Express Scripts spokesman.

Express Script shares fell more than 2 percent early Wednesday but were up 2.7 percent, to $58.75, later in the day.

The move draws to a close a turbulent saga that’s helped push Express Scripts shares down by roughly a third since January 2016, when the dispute between the companies became public. At an investor conference that month, Anthem CEO Joe Swedish said that the PBM had overcharged it by as much as $3 billion. The companies subsequently sued each other.

George Hill, an analyst at RBC Capital Markets, said it’s difficult to see how Express Scripts will fill the void in its business left by the end of its relationship with Anthem.

“We’ve all known this was coming. Anthem has telegraphed this punch for years. Today is the day of the final delivery,” said Hill, who has a sector perform rating on Express Scripts shares.

For Anthem, the move gives the company another avenue to compete with rival UnitedHealth Group Inc. The nation’s largest health insurer, UnitedHealth also runs its own pharmacy-benefits management business called OptumRx. That unit brought in $16 billion in revenue in the third quarter, UnitedHealth said in its earnings report this week.

“The launch of IngenioRx will allow us to break through what is now a complex and fragmented landscape,” Anthem CEO Swedish said in the statement. “It also positions Anthem to take advantage of a unique opportunity to grow and diversify our business within our existing footprint as well as nationally.”

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