LILLY WRITEDOWN OF PCS NOT UNEXPECTED

INDIANAPOLIS-Eli Lilly & Co.'s $2.4 billion writedown of its investment in PCS Health Systems Inc. is not symptomatic of widespread financial problems in the prescription benefit management industry, experts agree.

Drug manufacturer Lilly, which bought PCS in 1994 for $4 billion, last week announced the second-quarter non-cash charge, which devalues the asset on Lilly's balance sheet to $1.6 billion. PCS is the largest PBM in the country.

Indianapolis-based Lilly has no plans to sell the unit, according to a company statement. Charles E. Golden, executive vp and chief financial officer, said in the statement, "PCS remains a key part of Lilly's pharmaceutical strategies and holds significant potential for us."

The writedown "was pretty well expected by Wall Street," said Richard Vietor, a senior analyst specializing in the drug industry with Merrill Lynch & Co. Inc. in New York. Lilly's announcement is not indicative of broader problems in the PBM industry, he added. It simply reflects that PCS is "operating at a far lower level than they had anticipated."

Edward Kaplan, vp in the New York office of The Segal Co., said the writedown will "make the pharmaceutical manufacturers a little more hesitant" to acquire PBMs.

Lilly and others outlined several reasons PCS has not lived up to expectations.

They include "the collapse of government-initiated plans for large-scale health care overhaul, industry concerns about the Federal Trade Commission focus on the Lilly-PCS combination and the slowing of the industry trend toward strict managed health care," Randall L. Tobias, Lilly's chairman and chief executive officer, said in a statement. "These factors and the competitive environment that has limited the ability of certain PCS services to contribute to operating profits at anticipated levels have adversely affected our anticipated return from our investment in PCS. Therefore, we have determined that it is appropriate to make this adjustment."

Said Mr. Kaplan, "PCS certainly has a lot tougher competition now than it did five years ago."

Also, after Lilly acquired PCS, it unsuccessfully looked for some other company to buy into the PBM's ownership, which would have offset the hefty price Lilly paid for PCS.

Mr. Vietor noted that PCS' late entry into the mail-order prescription business also is a factor. Mail-order is "where the money is," he said, but PCS only last September launched a mail-order pharmacy.

In the wake of Lilly's acquisition of PCS, the FTC indicated it would continue to review the issue of drug manufacturers purchasing PBMs.

In a separate development in the PBM industry last week, the FTC last week informed Rite Aid Corp. that it has closed its investigation into the refusal by Rite Aid and other pharmacy chains to participate in a Maryland State Employees prescription drug plan managed by Merck/Medco Managed Care Inc., a PBM.

The retail drug chains balked at the plan, saying Medco's intended reimbursement rate for state employees was too low (BI, Jan. 1, 1996).

Martin Grass, Rite Aid's chairman and chief executive officer, said in a statement: "Rite Aid Corp. is seeking a fair price on the pharmacy services it provides. If our analysis of a prescription drug plan leads us to conclude that we are not being offered a fair price, then we will not participate."

A lawsuit filed by Merck Medco against Rite Aid in federal court is still pending.