Transcript Pharmacy Benefit Manager

Analysts: Su Chen
Gina Huang
Xuhao Yang
Jonathan Barki
Date: November 10th, 2011
1
Portfolio Position
RCMP currently holds 500 shares of WAG, bought on 6th Oct 1999
at the price of $25
For the previous trade day , WAG closed at $ 31.72 @11/9/2011
Holding value is 16% of total portfolio value
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Product Class
3
Walgreen
Drug Retail Market Share
4
Margin Analysis
5
Dupont Analysis
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Slow Store Growth
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Treasury Stock Plan
8
Past 5 Year Stock Performance
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Source: Yahoo Finance
Stock Performance Comparison
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Source: WSJ
Industry Structure
•Mature
Regulation
Level
•Medium
Revenue
Volatility
•Low
Barriers to
Entry
•Medium
Capital
Intensity
Concentration
Level
Life Cycle
Stage
•Medium
Industry
Globalization
•Low
•Medium
Competition
Level
•High
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Source: IBIS World
Per capita disposable income
 Per capita disposable income determines an individual's ability to
purchase goods or services
 Positive job growth and lower savings will lead to an annual growth rate of
1.6% over the outlook period, but the growth will be hindered by higher tax
rates needed to balance the fiscal deficit.
Source: IBISWorld
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Number of adults over 65 years old
 Older people are more likely to require medical attention or
assistance
 Baby boomers have started reaching the age of 65, resulting in
growth of over 3% a year
 The expansion of this group will be aided by further medical
innovations, superior nutrition and improved safety
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Source: US Census Bureau
Number of people with private health insurance
 The number of people with private health insurance has declined
during the five years to 2011, in response to the poor economic
environment.
 The number of people with private health insurance is forecast to
increase considerably during the five years to 2016, particularly in 2014,
when a health insurance exchange will be initiated.
 Ultimately, 32 million previously uninsured individuals are forecast to
gain coverage by 2019.
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Source: US Census Bureau
Federal funding for Medicare and Medicaid
 Medicaid is geared towards people with low incomes and Medicare
covers almost everyone 65 or older
 The Congressional Budget Office projects that Federal funding for
Medicare and Medicaid will rise at 6.70% per year to surpass a trillion
dollars by 2016. This growth
 Funding for Medicare rises at a high but largely stable rate. This is
because changes are driven by demographic shifts which occur
predictably and slowly over time. Meanwhile, Medicaid expenditures
fluctuate in accordance with the business cycle making it more volatile.
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Source: Office of Management and Budget
Generic drugs VS brand name drugs
 When the patent of a brand name medication expires, a generic
version of the drug can be produced and sold.
 Generic drugs are as safe and effective as the brand name
equivalent, with exactly the same ingredients, but are much
cheaper
 In general, generic drugs generate lower total sales dollars per
prescription, but higher gross profit margins , compared with
patent-protected brand name drugs.
 Generic drugs are more profitable for wholesalers because of
the enhanced bargaining position with generic manufacturers
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Big Three Wholesalers, Revenues and Gross Profits, Brand vs. Generic Drugs
Generic drugs represent about 9% of revenues but 56% of gross profits
Source: Pembroke Consulting estimates
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Walgreens to benefit from expiring patents
Patents to expire in 2011
Patents to expire in 2012
23% of Walgreens’ prescription drugs sales
Patent
Expiring
Company
2010 U.S.
sales
Lipitor
Pfizer
$5,329M
Zyprexa
Eli Lily
$2,496M
Levaquin
Johnson&
Johnson
$1,312M
Concerta
Johnson&
Johnson
$929M
Protonix
Pfizer
$690M
Source: IBIS World
42% of Walgreens’ prescription drugs sales
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Patent
Expiring
Company
2010 U.S.
sales
Plavix
Sanofi
$6,154M
Seroquel
Astrazeneca $3,747M
Singulair
Merck
$3,224M
Actos
Takeda
$3,351M
Enbrel
Amgen
$3,304
Biggest drugstore chain VS Top three PBMs
Walgreens failed to agree on
new contract terms with
Express Script, one of the
three largest Pharmacy
Benefit Managers(PBM)
The break-up with Express
Script will cost Walgreens
about $5 billion in annual
sales, or about seven percent
of its business.
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Pharmacy Benefit Manager(PBM)
 Pharmacy Benefit Manager (PBM) is a third party administrator
of prescription drug programs, primarily responsible for
processing and paying prescription drug claims.
PBMs like Express Scripts and Medco are patients' first point of
contact with the pharmaceutical supply chain. These PBMs are
using their massive scale to wield stronger bargaining power
over retailers, and are encouraging consumers to switch to their
own low-cost mail-order facilities instead of retail drugstores
As a result, retail drugstores like Walgreens are facing
unprecedented reimbursement and competitive pressure.
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Consolidation in the healthcare industry
Many organizations in the healthcare industry, including
pharmacy benefit managers, have consolidated in recent years
to create larger healthcare enterprises with greater market
power, which has resulted in greater pricing pressures to WAG
Two of the three largest pharmacy benefit managers, Medco
Health Solutions, Inc. and Express Scripts, Inc., announced an
agreement to merge in July 2011, completion of which is subject
to regulatory and other conditions.
If this consolidation trend continues, it may lead to further
pressure on the prices for our products and services and
adversely affect our business.
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Closest Competitors
CVS:
The Pharmacy Services segment provides pharmacy benefit management (PBM)
services, mail order services specialty pharmacy services, plan design and
administration and claims processing.
The Retail Pharmacy segment sells prescription drugs and general merchandise.
General merchandise include over-the-counter drugs, beauty products, cosmetics,
film and photo finishing services, greeting cards, and convenience foods.
Rite Aid:
Rite Aid sells prescription drugs and front end products. Front end products
include over-the-counter medications, health and beauty aids, personal care items,
cosmetics, household items, beverages, convenience foods, greeting cards,
seasonal merchandise, photo processing, and other everyday products.
Concerns
LIFO Inventory Reporting
Effects Costs of Goods Sold  Net Income and EBIT
Operating Property Leases as oppose to Capital
Property Leases
Overstates Operating Expenditure  Impacts Net Income and
EBIT
Understates Debt  Impacts Enterprise Value
Must be taken into consideration with Multiples
Cutting ties with Express Scripts
$5.3 billion sales lost, 7% overall sales
Effect earnings by 50 cents
Final Price
$34.31
10%
10%
80%
Multiple 1
$35.53
DCF
$33.24
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Multiple 2
$41.66
Our Recommendation
Stock price as of (11/9/2011): $31.72
HOLD
25