by Gary S. Meyers and L. Steven Platt

The Meyers Report hears a huge national drug store chain is preparing to sell its Pharmacy Benefits Management (PBM) operations to make itself a prettier acquisition target. The firm’s profits are flat-to-declining after a long strategy of deliberate overgrowth to eliminate competition, a planthat is backfiring. To save itself, the chain seeks to be acquired by a much stronger chain with a profitable PBM component. But first their PBM must go.

What are PBMs? Insurance companies usually insist that long-term, maintenance drugs are purchased in 90-day increments through mail order services at volume discounts. This gave rise to mail order prescription companies that in turn threaten the very existence of both the neighborhood pharmacy and the major drug companies.

Initially, to compete, the drug manufacturers bought PBMs. What better way to control the PBMs than to own them? Merck purchased Medco Containment Services in 1993. SmithKline Beecham bought Diversified Pharmaceuticals Services (DPS), supplying 14 million beneficiaries and selling (or buying) over  $2 billion in drugs in 1994. Eli Lilly bought PCS in 1994, and Pfizer purchased Value Rx.

More recently the retail drug chains got into the act for fear they would lose the most lucrative aspect of their business, refilling perscription maintenance drugs, to these insurance company PBM conglomerates. As a result, CVS merged with CAREMARK. Longs Drugs merged with Rx/American. And then there is the company in question.

Their strategy of expanding to crowd out the competition has worked, but they have paid a heavy price. Their PBM isn’t getting much business and  continues to lose prescription business to the PBMs. If this trend continues they will be out of business. At present the pharmaceutical aspect of their business remains one of their strongest components, hence the desire to lose their uncompetitive PBM. Then they can be taken over or merged with a stronger company that already owns a PBM.

The Bottomline: Less work means fewer jobs and lower pay. A sell out means a big payday at the stock market. Looks like the employees will get screwed again while upper management gets a hefty pay off.