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Fitch: Anthem Walking from ESRX Talks Raises Downside Risk
April 26, 2017 / 2:26 PM / in 6 months

Fitch: Anthem Walking from ESRX Talks Raises Downside Risk

(The following statement was released by the rating agency) NEW YORK, April 26 (Fitch) Express Scripts Holding Company's (ESRX, 'BBB' / Outlook Stable) announcement that Anthem, Inc. (Anthem, 'BBB+' / Rating Watch Negative) intends to move its business in 2020 was incorporated in Fitch's prior rationale for ESRX's 'BBB' rating, which also presumed that ESRX would adjust capital deployment as necessary to maintain leverage (gross debt/EBITDA) around 2x regardless of whether the contract was retained. ESRX publicly reiterated its commitment to this target in conjunction with the Anthem announcement, and Fitch believes the company will have the necessary financial flexibility to meet this commitment despite the loss of revenues and EBITDA contributed by Anthem. Anthem represented 15% to 18% of ESRX's revenues and 26% to 33% of adjusted EBITDA for 1Q15 to 1Q17, implying that this contract has margins approximately 2x higher than the customers that will remain. While the difference between margins is influenced by the $4.7 billion payment Anthem received at the start of the contract, Fitch nonetheless expects the loss of Anthem will be a hit to margins, which will moderate in the mid-single digits beginning in 2020, all else being equal. Perhaps more important to ESRX's credit profile, but currently very difficult to determine, is how this announcement adds to the broader conversation surrounding the longer-term profitability of the stand-alone pharmacy benefit manager (PBM) business model. In general, the role of PBMs is to save money for the health insurers and large employers that make up most of the industry's customer base by negotiating favorable pricing for pharmaceuticals. The lower growth rate between list (10.7% in 2016) and unit prices net of rebates (2.5%) that ESRX has delivered would indicate its success in doing so. While the loss of the Anthem contract is absorbable at the current rating level, if customer retention ultimately requires increased pricing concessions, it could further eat into ESRX's margins over the longer term as contracts roll. If this compromises ESRX's ability to and prioritization of maintaining leverage at or below the 2.0x target, it would likely result in a negative rating action. While Anthem's dispute with ESRX comes down a to a pricing dispute with one customer, it is occurring at the same time that other PBM customers are expressing concerns about the industry's pricing model. For example, this announcement follows the Health Transformation Alliance (a partnership of 38 large corporations) reportedly taking greater control of its employees' prescription benefits and requiring more transparency from their PBM partners. Contact: Britton Costa, CFA Senior Director +1-212-908-0524 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Bob Kirby, CFA Director +1-312-368-3147 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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