Systems Xcellence Should Continue To Benefit From PBM Disintegration

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The stock of Systems Xcellence (SXCI) has been on the move lately – 6.6% in the last two days and 32% in the past 3 months. The nominal reason is the winning of two contracts to service the pharmacy benefit portion of Medicaid plans in the State of Georgia. Both are take-aways from large integrated pharmacy benefits managers (PBMs) --Express Scripts (NASDAQ:ESRX) and CVS-Caremark (NYSE:CVS).

We believe that this is just the beginning of a long term trend toward the “dis-integration” of pharmacy benefit management functions. SXCI is an application service provider of pharmacy benefit claims-processing with a transaction fee-based business model. They are the key enabler of this trend. The large integrated PBMs assert that there are significant economies of scale in their business and that their integrated approach is the least cost solution.

Scale economies are real in claims processing and mail order, the heavy-lifting side of the business. Price and rebate negotiations are the other side of the PBM business. Theoretically, buyer size should matter and produce superior results. But government and private healthcare plan sponsors are sensing that, by moving negotiations in-house, the gains from transparency outweigh any losses due to scale.

The problem with any “carve-in” of the supply chain management side of the PBM business is what to do about the claims processing. This is where SXCI comes in. They are the premier enablers of any move to disintegrate PBM functions. The company should continue to grow for years.

Disclosure: Author is long SXCI

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