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Express Scripts, Anthem pricing talks could benefit both


Contract negotiations between Anthem Inc. and Express Scripts Inc. could benefit both companies, especially in light of Anthem's pending acquisition of rival health insurer Cigna Corp.

In 2009, St. Louis-based Express Scripts acquired then-WellPoint Inc.'s NextRx subsidiaries for nearly $4.7 billion, including a 10-year agreement under which Express Scripts would provide pharmacy benefit management services to Indianapolis-based Anthem.

The agreement allows for a periodic pricing review — a process the companies used in 2012 that resulted in a “mutually beneficial agreement,” Express Scripts CEO George Paz said during a conference call Tuesday on 2016 financial guidance.

“Because of the nature of the transaction with Anthem in 2009, their contract is unique within our book of business,” Mr. Paz said. “Specifically, the pricing review provided for in the Anthem agreement is unlike traditional provisions that exist elsewhere in the industry, and there are any number of factors that could influence the terms and the breadth of any financial agreement between the parties.”

One important dynamic is Anthem's planned $54 billion acquisition of Bloomfield, Connecticut-based Cigna, which is expected to close in the second half of 2016, said John Kreger, a Chicago-based principal at William Blair & Co. L.L.C.

Cigna's PBM business currently is handled by OptumRx, a UnitedHealth Group Inc. unit that merged with Catamaran Corp. in July.

The Cigna deal could help Express Scripts increase its volume and Anthem could benefit from reduced rates under a repriced contract, Mr. Kreger said.

“We see this as a potential win-win for both companies,” he said.

Anthem CEO Joseph Swedish started talking about Express Scripts' rates being above-market about a year or two ago, Mr. Kreger said.

“From a standpoint of stocks, it's not a new issue, but Express Scripts is talking more publicly about it,” he said.

The contract with Anthem accounted for 14% of Express Scripts' 2014 revenue, and Mr. Kreger estimated that the 275 million claims generated roughly $4.00 in earnings per claim before interest, taxes, depreciation and amortization and contributed about $1.11 in earnings per share annually.

He also said resolving the current round of talks is not assumed in Express Scripts' 2016 guidance, which implies that any change in the Anthem contract would affect 2017 revenue rather than 2016.

Express Scripts is “excited to continue productive discussions with Anthem,” said Mr. Paz, who did not disclose when the talks would get done or likely financial terms.

Several analysts asked whether the 10-year agreement might be extended and whether the terms would be similar to 2012.

“I don't really want to negotiate the contract on this phone call, so we try to stay away from that,” Mr. Paz said. “Obviously, we would love to get an extension as part of this negotiation, but that remains to be seen at this juncture.”