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

10 Top Reasons For Getting Fired

The 3 Best States to Start an LLC

10 Jobs That Allow You to Travel

7 High-Paying Jobs You Can Do From Home

12 Best Cities to Shop in USA

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

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

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!