Mylan NV (NASDAQ:MYL) CEO Heather Bresch testifies before Congress Wednesday over the rising price of her EpiPen.
Rather than take the heat alone, she’s expected to blame a broken pharmacy benefit manager (PBM) system that demands huge rebates on drugs, ostensibly to keep patient costs low.
While media attention immediately turned toward Express Scripts Holding Company (NASDAQ:ESRX), the largest pure-play PBM, savvy investors might look instead at UnitedHealth Group Inc (NYSE:UNH), the nation’s largest health insurer.
Here is why.
UNH Now the Third-Largest PBM
While the fight in Congress would seem to pit drug companies against PBMs, someone is bound to notice that the third-largest PBM, the company leading the consolidation charge within the industry, is owned by UnitedHealth.
UnitedHealth bought Catamaran Corp. last year, for $12.8 billion, merging it into its OptumRX to become the third-largest player in the $263 billion PBM market, and the only one with vertical integration into health insurance.
That deal is putting pressure on the stock prices of both Express Scripts and CVS Health Corp (NYSE:CVS), which owns the number-two Caremark PBM and is down nearly 11% over the last year.
The field has undergone intense consolidation during this decade, with Express Scripts buying Medco in 2012 for $29 billion, and SXC Health Solutions Corp. buying Catalyst Health Solutions to create Catamaran for $4 billion. SXC, originally a software platform for PBM companies, had in turn acquired six others since 2008.
Pharmacy benefit managers are supposed to negotiate with drug companies for low prices and pass those savings on to patients. But if the PBM is actually a health insurer, one can ask, where are the savings going?
OptumRX Rocket Fuel of UNH Growth
Since closing the Catamaran deal, UNH stock has been on fire, up nearly 5%.
Revenues, which had been $36.3 billion in the quarter before the deal, stood at $46.5 billion last June. Net income in those same quarters only rose from $1.58 billion in 2015 to $1.75 billion in 2016 thanks in part to what were called “other operating expenses,” which rose from $379 million to $511 million. These are usually merger-and-litigation-related expenses, but they have stayed stubbornly high since the merger.
If a PBM is pulling money out of drug companies by forcing drug price hikes and granting rebates, where is the money going in the case of United Healthcare?
One place would seem to be the other operating expenses bucket.
While the list price for the EpiPen has skyrocketed since Mylan acquired the product line nine years ago, the net price, which is what patients pay, has not due largely to rebates. ESRX says 90% of its rebates flow through to patients, and co-pays have not increased.
But that still leaves 10% of the PBM drug rebates unexplained, and it is clear companies like MYL have not been hurt by the change in the system. Margins at its specialty pharmaceutical division, which includes EpiPen, were 60% in the second quarter of 2016, against about 9% in 2008.
The Wednesday hearing could be just the start of a long, winding road for the drug and PBM companies, especially if Hillary Clinton is elected president in November, as now seems likely.
Back Away From The 900-Pound Gorilla
Attention is also likely to turn to UnitedHealth because it has become the 900-pound gorilla in the health insurance space.
Compare its $46.5 billion in second-quarter revenue with Wellcare Health Plans, Inc.’s (NYSE:WCG) $3.6 billion during the same quarter, or even Anthem Inc’s (NASDAQ:ANTM) $21.5 billion. Humana Inc (NYSE:HUM) had $14 billion in revenue and Cigna Inc. (NYSE:CI) $10 billion during the quarter.
I have pounded the table myself for UNH stock in the past, calling it a buy in April and again in July, but as the PBM situation threatens to become the PBM “scandal” I would suggest that defensive shareholders might want to take some profits and back away quietly.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in any companies mentioned in this article.
