Executive Briefings

Drug Middlemen - Unlike Other Industries - Report Slim Profit Margins

Companies of all kinds try to present their financial results in the best light possible to attract investors. One segment of the drug industry is bucking that trend, using an accounting method that narrows its profit margins.

The three big middlemen for prescription drugs, known as pharmacy benefit managers, or PBMs, had operating-profit margins last year of 4 percent to 7 percent, a level that lags the 16 percent average among S&P 500 companies. Were they to tally their revenue the way many middlemen in other industries do, their margins would more than double.

Several drug industry analysts said that booking revenue in a way that shows lower margins might have helped the companies deflect criticism of their pricing practices. “It hides a lot. It’s as simple as that,” said Ravi Mehrotra, a partner at the MTS Health Partners investment bank.

High margins are generally a lure for investors. But several analysts cautioned that very high margins in this industry could be unsustainable given the political pressure to control drug prices.

The PBMs’ method of counting complies with generally accepted accounting principles. Regulators haven’t expressed displeasure with the way these drug middlemen — namely the PBM units of CVS Health Corp., Express Scripts Holding Co. and OptumRx (part of UnitedHealth Group Inc.) — present their revenues, costs and margins.

Read Full Article

The three big middlemen for prescription drugs, known as pharmacy benefit managers, or PBMs, had operating-profit margins last year of 4 percent to 7 percent, a level that lags the 16 percent average among S&P 500 companies. Were they to tally their revenue the way many middlemen in other industries do, their margins would more than double.

Several drug industry analysts said that booking revenue in a way that shows lower margins might have helped the companies deflect criticism of their pricing practices. “It hides a lot. It’s as simple as that,” said Ravi Mehrotra, a partner at the MTS Health Partners investment bank.

High margins are generally a lure for investors. But several analysts cautioned that very high margins in this industry could be unsustainable given the political pressure to control drug prices.

The PBMs’ method of counting complies with generally accepted accounting principles. Regulators haven’t expressed displeasure with the way these drug middlemen — namely the PBM units of CVS Health Corp., Express Scripts Holding Co. and OptumRx (part of UnitedHealth Group Inc.) — present their revenues, costs and margins.

Read Full Article