Drug Stores

1. Drug Stores Ian Johnston Section 2

2. The Industry • Drug Stores • CVS • Walgreens • Walmart • Pharmacy Benefit Managers (PBMs) • Express Scripts (largest) • Caremark (part of CVS) • 60 in total

3. Relationship between PBMs and Drug Stores • PBMs process prescriptions for the groups that pay for drugs (insurance companies or corporations) • Use size to negotiate with drug makers and pharmacies • Act as middle man between payer and the rest of the health care system • Revenue comes from service fees generated from customer contracts • Processing prescriptions • Mail-order pharmacies • Negotiating with drug makers and sellers • Generates cost savings for customer and profits for PBM

4. Comparable Firms • Walgreen Co. • 2013: $72.2 B in sales, $45.5 B in prescription sales • CVS Caremark • 2012: $123 B in revenue (including PBM revenue) • Wal-Mart • 2012: $37 B in Health & Wellness revenue • Express Scripts • 2012: $93.9 B in revenue

5. Porter’s Competitive Analysis Industry Competition- High Bargaining Power of Buyers- High Bargaining Power of Suppliers- Lowers as customer base grows Threat of Substitution- Low Threat of Entry- Low

6. Express Scripts Holding Co Pharmacy Benefit Manager (PBM) Develop strategies to keep medications affordable Merged with Medco Health Solutions in 2012 Headquartered in St. Louis, MO Largest PBM company in the US

7. ESRX • Clients • Managed care organizations • Health insurers • Third party administrators • Employers • Union-sponsored benefit plans • Worker’s compensation plans • Government health programs

8. ESRX • Manage cost of drugs • Evaluate drugs for price, value, and efficacy • Leverage purchase volume to get discounts • Promote use of generics and low cost brands • Cost-effective home delivery pharmacy • Promotes healthier outcomes for patients • Behavioral science • Clinical specialization • Insight from actionable data

9. ESRX • Segments • PBM • Other Business Operations • Distribution of pharmaceuticals • Gathering scientific evidence to guide safe, effective, affordable use of medicines • Revenue breakdown • 99% from prescription drug deliveries to members • 1% from services (admin fees, counseling services, etc)

10. ESRX • PBM Services • Management of outpatient prescription drug utilization • Health Decision Science • Behavioral sciences • Clinical specializations • Actionable data • Allow patients to make better decisions about their health and the cost of care

11. ESRX • Other Business Operations • Represents less than 3% of revenue • Comprised of integrated brands that service patients • Develops scientific evidence to guide safe, effective, affordable use of medicines • Suppliers • Provide brand name and generic drugs • Purchase from manufacturers or authorized wholesalers

12. SWOT Analysis Strengths Weaknesses Opportunities Threats

13. Strengths • Size • Largest PBM • Huge customer base used to leverage discounts • Established Network • Switching costs for customers are high

14. Weaknesses • Disappearance of cheaper alternatives for drugs • Lack of generics to cut costs for customers • Competitive environment • Many PBMs exist providing similar services

15. Opportunities • Take advantage of newly insured under the Affordable Care Act • Opportunity to further expand network of customers • Create further cost savings for customers • Merger creates more leverage in negotiating with suppliers • Becoming the lowest cost PBM would be key

16. Threats • Loss of major contracts with customers to competitors • Decreases network of customers • Less bargaining power over suppliers • A price war with other PBMs could erode margins • Environment is highly competitive • Gross margin is 7%, Net margin is 1.3%