Medco Fans Checking the Mail

"As generic pricing erodes, the price PBMs pay for generic drugs declines, but the rate at which they are reimbursed is largely fixed for the duration of its contracts with clients, hence creating a near-term opportunity which may be underappreciated," Rhyee explains. "However, we believe the expanding profit margins for PBMs will not go unnoticed, and this benefit will be temporary, as the competitive dynamics of the business and market efficiencies erode that profit opportunity over time."

Still, Rhyee expects the boost to last through 2006, and in the meantime he continues to maintain his overweight rating on the group.

Wall Street updated its outlook for the sector the same week that the Federal Trade Commission issued a long-awaited study on the industry's mail-order pharmacies. The FTC found that health plan sponsors have "generally" paid lower prices for drugs purchased from mail-order pharmacies that are owned by PBMs than from those that are not. The agency did, however, note that generic drugs proved cheaper at retail-owned PBMs. Still, it deemed the use of PBM-owned mail-order pharmacies "generally" cost-effective for plan sponsors.

The industry's powerful trade group was quick to trumpet those findings.

"The Federal Trade Commission's unanimous finding today that PBM-owned mail-service pharmacies provide lower drug prices than drugstores and mail-service pharmacies owned by retail chains confirms what other government and industry data ... have successively shown since 2002," said Mark Merritt, president of the Pharmaceutical Care Management Association. "Once and for all, this report gives a green light to policymakers and purchases to embrace the PBM mail-service pharmacy option for seniors, the disabled and working families."

Congress ordered the FTC's "Conflict-of-Interest Study" amid intense government scrutiny of the group as it prepares to capitalize on major Medicare expansion opportunities. It is the most recent of many government studies that have gone in the industry's favor.

But Robert Garis, a pharmacy professor and PBM research expert at Creighton University, tends to doubt such findings. He cites independent studies -- including his university's own -- showing that PBM mail-order pharmacies actually cost employers more than normal retail outlets. However, he says the government depends heavily on industry-supplied data when reaching its conclusions.

"I am circumspect," he says, "because I know the industry."

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