$ESRX – Continued Growth

Some people think I should be impartial on my blog. But, no one really wants to read posts that are just PR recast for the sake of driving hits to the blog. One of the things I did a lot at Express Scripts was to see new research, try to find flaws in it, point out the flaws, and then try to find ways to innovate around them. I enjoy doing that here. With a lot of my clients, I get to do that in meetings where they respect my bluntness around what they are or aren’t doing. In other cases where I’m not included in those dialogues, I may play out some of those thoughts here. Hopefully, it’s a helpful perspective.

I have a fine path to walk which is to protect the confidentiality that I have with lots of PBMs while at the same time providing a fresh perspective on the industry. I hope all of you view it that way. I know all the analysts and competitive intelligence people enjoy what I talk about and lots of industry veterans find the views worthy of discussion. But, I think of few people take the intellectual challenges personally. Don’t.

One thing that a few analysts have asked about is my thoughts on why Express Scripts stock has done so well (see below). The short answer is FOCUS. But, I’ve certainly learned from talking to them that I see things differently. I’m often looking at the edges of the strategy and the innovation versus focusing on what the day to day operations are doing. At the end of the day, the analysts and the street are pretty focused on achieving the quarterly numbers.

Some of the things that they do that have made them successful are listed below.

1. Focus. They have been one of the few companies that have really stayed the course on the PBM core business model – processing claims and mail order. I’ve talked to a bunch of the Wall Street analysts to gain their perspective. They look at things differently. While I may find much of the ancillary activities and strategy more interesting, George Paz (CEO) has been great at keeping them focused on what matters and constantly improving the key metrics.
2. Integration. One of the best things they’ve done repeatedly is buy PBM assets and integrate them into the core system and existing business processes. This drives efficiency and scale which is critical to the core model.
3. Research. From early on under Barrett Toan, the company brought in a group of statisticians and researchers. They focused on using data to research interesting topics and publish them. Eventually, this got better integrated with product management, and this now gives them a core team around which to build on for segmentation and predictive models. (Note: This research focus has become the norm in multiple PBMs now.)
4. Consumerology. While I could talk on this one for days, this was an important move. They claimed the space before anyone truly realized it was the competitive battlefield for PBMs. They found a way to rapidly test things and package them up for the market to digest. (Although I’m disappointed that the Consumerology blog seems to have died with no new postings since May.)
5. Generics. They realized early on that there was more money to be made from generics than from rebates and pushed hard for this. (Although I’ll admit to a few ugly meetings between me and the rebate team early on.) This positioned them well (“we save when you save”) and allowed them to have a leading generic fill rate (GFR) for years (although others have made up much of that ground).
6. Intense Culture. The company has successfully adapted and rallied around numerous challenges with a relentless focus. For those that like this culture and can adapt on the fly, it creates a highly intensive environment of competitive people. They’ve created a GE culture of rewarding the high performers and creating competition for upward mobility. And, there is a hyper focus on a few key competitors – Medco and CVS Caremark… a lot of my friends didn’t even know who the other PBMs were.
7. Worker’s Compensation. This business unit struggled to find a home forever, but some core people continued to push it based on the margins it represented. They seem to have doubled down with their acquisition of MSC a few years ago and have brought their lower cost approach to the market to win business.
8. Medicaid. They seem to be one of the few PBMs that have traditionally played in the managed Medicaid business. Given the increase in lives that may come into Medicaid via healthcare reform, this could create a large growth opportunity.
9. Golden Handcuffs. When you have a stock that’s growing like this, what do you want to do…tie people to the stock. The executives have huge investments in the stock and traditionally got lots of options. People that have been there for years have lots of options. This has definitely reduced turnover.
10. Small Risks. They have also tried a lot of things under the radar. If it wasn’t for an analyst, I wouldn’t even know that they had started a GPO with Krogers. And, they barely talk at all about their work in China. The view there has definitely been that when you try something new to manage the risk.

All the PBMs are doing interesting things. The market has become very dynamic compared to some of the “me-too” days of old. Everyone is finding their space and claiming it. The next few years will continue to be interesting.

[A point of clarification and disclosure – I do not own any individual Express Scripts stock although it may be held by some of the funds that I have invested in.]