Express Scripts Holding Company (ESRX), Walgreen Company (WAG): This Stock Just Solidified Its Dominance

Page 1 of 2

Few things are certain in investing, but Express Scripts Holding Company (NASDAQ:ESRX)’ dominance of the pharmacy benefit manager (PBM) market is virtually assured after its $29 billion acquisition of Medco last year. As a result of the acquisition, Express Scripts now has more than 100 million members and controls one-third of U.S. pharmaceutical spending.

Express Scripts (ESRX)Bargaining power

The company’s year-long squabble with Walgreen Company (NYSE:WAG) is a prime example of its bargaining power as the largest PBM in the United States.

When Walgreen did not immediately agree to price cuts, the drug store chain was cut out of Express Scripts Holding Company (NASDAQ:ESRX)’ network. As a result, Walgreen lost $4 billion in revenue, while Express Scripts hardly suffered. What’s more, the damage to Walgreen is probably permanent, as its old Express Scripts customers now use different pharmacies; Walgreen will have to give them a reason to switch back.

If Express Scripts can push around Walgreen — the nation’s largest drugstore chain — then it certainly has significant bargaining power. In fact, PBMs’ bargaining power will only continue to grow as the industry consolidates — putting retail pharmacy chains like Walgreen at a growing disadvantage. And, as the largest and most powerful company in the industry, Express Scripts will reap most of the rewards at drugstores’ detriment.

Competition looking for the exits

Smaller competitors like Wellpoint and Aetna are trying to exit the PBM business — as attempts to compete with Express Scripts Holding Company (NASDAQ:ESRX) are futile.

However, CVS Caremark Corporation (NYSE:CVS) has made a strong commitment to its integrated offering that includes clinical services and a retail pharmacy in addition to pharmacy benefit management. Management had hoped that the company could cross-sell customers on its own services and gain more control over its own costs. It could compete with Express Scripts by building its own complete ecosystem that no other PBM could penetrate.

However, the strategy as not worked out as well as planned. Although revenue has increased, the planned cost savings have never shown through and margins have fallen for CVS’ PBM business.

In addition, CVS is subject to the same pricing pressure from PBMs that has eroded Walgreen Company (NYSE:WAG)’s moat. Namely, if CVS wants to keep traffic flowing from customers using other PBMs, then it must submit to the price pressure from the increasingly-powerful companies.

As a result, the outlook for CVS is no different than that of Walgreen Company (NYSE:WAG): it will eventually cede all power to PBMs.

It’s good to be a PBM

With that said, it is not so bad if you are the largest PBM in the U.S. Express Scripts Holding Company (NASDAQ:ESRX)’ enormous scale not only affords it greater bargaining power, it also allows it to offer a better value proposition to its customers due to its ability to lower prices.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!