PBM Industry Shows Strength: 3 Stocks In Focus

The role of pharmacy benefit managers (PBM) in the U.S. healthcare sector has been evolving. From being just third-party administrators of prescription drug programs, PBMs have come a long way. PBMs currently play a major role in managing pharmaceutical spending and enhancing health benefits for end-users.

Notably, PBMs are mainly accountable for the development of formularies, discussing discounts with major drug manufacturers and pharmacy contracts. These firms also play an important role in the settlement of prescription drug claims.

As per Congressional Budget Office (CBO) estimates, PBMs have the potential to save as much as 30% in total drug spending relative to unmanaged purchasing (data published in ‘The Economic Benefits of Pharmacy Benefit Managers’ by Orszag and Green).

Undoubtedly, the PBM market is expected to continue the solid trend. Per a report by Market Research Reports.biz, the PBM market will see a CAGR of 7.16% between 2014 and 2019.

Factors Driving PBM

Historically, there have been a number of factors supporting growth in the PBM market. Rising healthcare expenditures along with higher cost of drugs and other healthcare services have driven demand for PBMs who act as middlemen between the payer and other entities in the system.

We are also encouraged by a Centers for Medicare and Medicaid Services report published by Advisory Board on rising U.S. healthcare spending. Per the report, the U.S. healthcare spending is projected to rise to around $5.5 trillion by 2025, representing 19.9% of Gross Domestic Product (based on assumptions that the Affordable Care Act will continue through 2025).

The PBM market largely benefits from an aging population which tends to depend on drugs and pharmacy benefit plans. Per a report by Technavio, nearly 14.4% of the U.S. population is aged 65 years and above which buoys optimism.

Many analysts believe that rising expenditure on prescription drugs and growing demand for specialty drugs have also been strengthening the PBM market. The Centers for Medicare and Medicaid Services report published by Advisory Board predicts a continuation of this trend. Per the report, prescription drug spending is projected to grow roughly 7% between 2018 and 2019.

Per a 2017 Economic Report on U.S. Pharmacies ad Pharmacy Benefit Managers, specialty drugs accounted for about one-third of the pharmacy industry’s revenues in 2016.

Mergers & Acquisitions Change PBM Landscape

The PBM market has always been dominated by a handful of large players. In 2007, CVS’ merger with Caremark Rx to form CVS Caremark, now CVS Health (NYSE:CVS) , had a huge impact on the functions and scope of PBMs. Again, CVS Health announced a historic decision to acquire health insurance giant Aetna (NYSE:AET) .

People in support of the merger view it as a vertical integration instead of a horizontal one which will lead to efficiency gain and solid cost cutting at CVS Health’s PBM business. Notably, a horizontal integration increases the chances of monopolistic practices in the market.

Following the announcement of the CVS-Aetna deal, another leading health service company — Optum, part of the UnitedHealth Group (NYSE:UNH) — announced its decision to acquire DaVita Medical Group, a leading independent medical group and a subsidiary of DaVita Inc. (NYSE:DVA) .

Moreover, it is being speculated that Wal-Mart Stores, Inc. (NYSE:WMT) might soon announce the acquisition of health and well-being company, Humana Inc. (NYSE:HUM) to counter competition.

3 Stocks to Scoop Up

As the PBM industry is constantly expanding, this industry is worth keeping an eye on. Here are three PBM companies with promising prospects.

CVS Health: Headquartered in Woonsocket, RI, CVS Health, with its subsidiaries, provides integrated pharmacy health care services. This leading PBM company has a market cap of about $73.8 billion. Its earnings are estimated to grow 9.1% in the next three to five years.

Apart from the Aetna deal earlier, CVS health has announced plans to set up a new 30,000-store performance-based pharmacy network fixed by CVS Pharmacy and Walgreens Boots Alliance, Inc. (NASDAQ:WBA) , as well as up to 10,000 community-based independently owned pharmacies across the United States. Through this initiative, the company intends to promote cost saving and enhance clinical outcomes which will eventually reduce costs for CVS’ PBM customers.

CVS Health Corporation Price

Express Scripts (NASDAQ:ESRX) : Headquartered in Saint Louis, MO, Express Scripts operates as a PBM company in the United States, Canada and Europe. The company has a market cap of about $38.83 billion. Its earnings are estimated to grow 9.7% in the next three to five years.

Notably, the company’s PBM segment offers clinical solutions, specialized pharmacy care, home delivery and specialty pharmacy, retail network pharmacy administration, benefit design consultation, drug utilization review, drug formulary management, administration of a group purchasing organization, and consumer health and drug information services. Moreover, this segment provides Medicare, Medicaid, and health insurance marketplace products.

The company recently announced plans to acquire privately-held and evidence-based medical benefit management services provider — eviCore healthcare. Notably, by integrating eviCore's medical benefits management (MBM) platform with its PBM offering, Express Scripts intends to combat rising healthcare costs.

Express Scripts Holding Company Price

Rite Aid Corporation (NYSE:RAD) : Operating through Retail Pharmacy and Pharmacy Services segments, Rite Aid owns a chain of retail drugstores in the United States. The company has a market cap of about $1.91 billion.
Notably, the company’s Pharmacy Services segment provides PBM services and a range of pharmacy-related services. This segment also provides prescription adjudication services for other PBMs, offers integrated mail-order and specialty and compounding pharmacy services, and provides infertility treatment as well as drug benefits under the Medicare Part D program.

Rite Aid Corporation Price

Bottom Line

Although these companies have solid prospects, they are exposed to challenges like legal regulations, reimbursement pressure and the speculated entry of Amazon.com, Inc. (NASDAQ:AMZN) in the PBM market.

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