Where Did All That EpiPen Money Go?

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About: Mylan Inc (MYL), Includes: ANTM, CVS, ESRX, UNH
by: Dana Blankenhorn

Summary

Mylan CEO Heather Bresch fingered pharmacy benefit managers in her Senate testimony.

But the biggest PBMs are trading down, and their results are not improving.

Someone is in for a shock next year. Investors need to know who.

Everyone has opinions about the Mylan (NASDAQ:MYL) (let's call it a) situation.

The "reason" given by CEO Heather Bresch for the skyrocketing costs of EpiPens involves the way the medical reimbursement game is played. Rebates are demanded, those demands escalate, and they're used to make sure that some customers - mainly those with good insurance - don't face increased co-pays.

Bresch specifically fingered Express Scripts (NASDAQ:ESRX), the largest Pharmacy Benefit Manager or PBM in the market.

This makes logical sense, but if you look at the numbers, the sense kind of disappears. Express Scripts' revenue hasn't changed since 2013, after it absorbed Medco Health, then the number two player in the market. This looks to be another year of flat numbers, and after Anthem (NYSE:ANTM) threatened to bolt in January, the stock tanked. It still hasn't recovered, despite two more quarters of same-old same-old.

The situation is even worse for CVS (NYSE:CVS), whose Caremark unit is now the second-largest player in the market.

CVS is down 7% so far this year, and down 18% since its own plunge that came during the third quarter of last year, from which it also has not recovered. Raising the dividend to 43 cents from 35 cents does not seem to have helped.

Again, you can't find real evidence for this in the numbers. CVS's quarterly revenue is actually up $5 billion, from $38 billion to $43 billion, over the last four quarters. There is little to distinguish these numbers going back years. Growth has been steady. There has been some reduction in margins, and net income has gone down from $1.27 billion in June a year ago to $924 million in the most recent quarter.

But the theme of Ms. Bresch's testimony was that the PBMs were squeezing her poor little drug company (revenues of $9.4 billion last year and on pace to beat $10 billion easily) half to death, forcing these nasty price hikes.

If the PBMs aren't stashing record profits, who is?

The answer may be hiding in plain sight. Remember how Anthem was threatening to leave Express Scripts? Their revenue grew from $71 billion to over $79 billion over the last three years, and is on pace to easily top $80 billion this year. Net income is also up.

But these are modest gains. If the insurers were the folks doing the squeezing, you would expect to see some better numbers than that. But at least now, we're on the right track.

Because there is one company that combines the functions of an insurer and a PBM. It's UnitedHealth (NYSE:UNH), which bought Catamaran last year to become the third-largest player in the PBM game through its OptumHealth unit.

After buying Catamaran, United picked up about $20 billion in new business per year, reasonable given that Express Scripts was doing $100 billion. But even United's net income hasn't really budged much, with net income up only $1.5 billion year over year, at $1.754 billion in the June quarter.

So where did all this money go? I have my own suspicions, which start with a closer look at UNH's income statement. Wherever it went, it's not going to be there much longer, and people holding these stocks may be in for a shock next year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.