2023 Theme: Pharmacy Benefit Managers Are Finally In Real Trouble As Businesses. What Does This Mean More Broadly?

Originally we had planned on writing in this space about Disney and what we believe to be their misguided pivot into sports gambling.

HOWEVER, that will have to keep because on Thursday there was some news out of Disney's home state of California that changed our plans and also sent shudders through a small corner of the US corporate world.

The beginning of the end of the Pharmacy Benefit Managers is upon us.

This is hopefully GREAT news for everyone but PBM shareholders. Here is what happened:

Early on Thursday a major US insurer, Blue Shield of California, announced that it was ending its corporate partnership with CVS Caremark, one of the US's 3 major pharmacy benefit managers.

Most ominously, the non-profit insurer made it known that it wasn't replacing them with a single company but rather a combination of them including Amazon and a new drug startup backed by outspoken entrepreneur, Mark Cuban.

Blue Shield estimates that it could save as much as $500 million with this move which, if true, is an incredible sum. It is interesting to note that Blue Shield's decision was partly driven by its refusal to get a cheaper generic for one condition.

The market reaction was swift. By market open CVS Caremark's shares were down 8%. Its competitive peers in the PBM game, UnitedHealth and Cigna, also had rough days in the market as well because, though unaffected by Blue Shield's decision their profits could be severely hampered by both more competition and a different approach to drug plans.

In terms of CVS itself, the company itself was unable to avoid confronting the bad news. CVS filed a statement with the Securities and Exchange Commission late on Thursday reporting the Blue Shield shift will have an immaterial impact on the company’s financial results. ​

This is a regulatory requirement for all publicly traded companies but obviously companies try their best to avoid having to bite the bullet.

To better put this into context, CVS Caremark was unable to avoid a fate that, at least so far, AB Inbev has been able to sidestep with its own travails over Bud Light.

Obviously tough times for pharmacy benefit managers but unlike AB Inbev or other troubled companies, this could only be the beginning. These companies have quite happily made supernormal profits for years and control over 80% of the market.

That could all be about to change. They could lose customers AND they could be forced to negotiate reduced profits with the customers they retain..

Regular Pebble readers will know that we have covered Pharmacy Benefit Managers twice and essentially argued that these companies were very vulnerable to significant reform and therefore lower profits.

You can read our previous work here and here.

Well now the collapse is happening and it could only accelerate from here.

The reason?

Times are tight, especially for insurers that are trapped in a vice of an older demographics on one hand and tough regulation from politicians on the other.

That means they are obviously looking for cost savings and pharmacy benefit managers are obviously now directly in their crosshairs.

It isn't just insurers though. Regulators such as the FTC and politicians in Congress will also be watching closely and further reform of the pharmacy sector and drug prices in particular. We have often noticed that regulatory spines stiffen only AFTER the private actors begin to act.

Regardless, this now makes the third time we have written about these companies and their stock market has been consistently been voting with its feet all year:

As you can see, while this week was rough, the underperformance has been going on for months and months.

As we have also pointed out each time, you can now do something about this!

You can easily exclude these three companies from your portfolio and then sleep soundly knowing you have nothing to do with them and their troubles.

We have also previously pointed out that UnitedHealth has fallen out of the top 10 companies by market cap size and made the point that, typically, when that happens it doesn't reverse. As companies like GE or Cisco or Intel can attest, your share price can fall for a looooooong time before hitting rock bottom.

The great age of PBM super profits is likely coming to an end. These companies will continue to exist but they will be bad intermediaries in the healthcare sector and even worse stocks to own.

The big development other than the fact that we are at the beginning of the end is that you can do something about it. The power is yours.

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