In today’s earnings announcement, AmerisourceBergen, parent company of work comp PBM/ancillary services firm PMSI, detailed the financial impact of the deal.
ABC carried PMSI on the books at about $260 million; by selling the property for $40 million (plus a $10 million contingency) ABC will be taking a $222 million hit as a result of the transaction. On an earnings per share basis the result is 1.37 per share, giving ABC a net loss of $108 million, or 67 cents per share.
Observers who are confused about the recent on-again, off-again status of the PMSI sale can be forgiven for that confusion; ABC has been somewhat schizophrenic about its dealings with PMSI. After putting PMSI on the market early this year, ABC announced last month that the company was not going to sell PMSI after the initial offers came in well under expectations. According to ABC’s CEO David Yost, “We look to PMSI to be on track in the September quarter and into fiscal ’09.”
Contrast this with Yost’s announcement today – “We were very disappointed with PMSI’s performance in this quarter, and after re-evaluating our alternatives, we decided to sell the PMSI workers’ compensation business in order to focus our full attention on our pharmaceutical distribution and related businesses and allow H.I.G. to focus on the opportunities at PMSI.”
ABC’s impatience with the turnaround may have played a role, but from here it looks like the hammering Yost took over ABC’s overall financial performance to date may have been more of a motivator.
HIG, the investment firm that bought PMSI does have some experience in this space with investments in Align Networks and Gould and Lamb. They have been quite successful in selling properties and generating rich returns for their investors, a history that bodes well for PMSI. And for the PMSI employees who add value, are flexible, focus on customers, and don’t buy into the “we do it that way because that’s the way we’ve always done it” nonsense.

PMSI, the workers comp PBM and ancillary services provider, will announce today that it has been sold to investment firm HIG. Sources within PMSI indicate the stock deal is worth $50 million, of which $10 million is contingent on achieving certain performance measures. Current management will likely remain in place after the deal closes in about 60 days.
The timing of this transaction is coincident with Express Script’s announcement of the closing (sub req) of their acquisition of MSC’s Pharmacy Benefit Management business. Express Scripts is now poised to become one of, if not the largest workers comp PBMs.
These deals are the latest in a series of financial transactions and potential transactions involving work comp PBMs. Cypress Care was recapitalized by investor Brazos Private Equity in November, 2006; Fiserv sought to sell its third party biller/PBM business early last year; Coventry purchased First Script as part of the Concentra transaction, and MSC itself was purchased by Monitor Clipper early in 2005.
PMSI has been struggling of late, losing the Hartford’s business (while retaining SRS (Hartford’s TPA)) to ESI and CNA late last year to Coventry. While PMSI’s parent company, Amerisource Bergen, was somewhat of a distant parent and may not have provided the attention and resources necessary for PMSI to maintain its historical leadership position, there’s no question HIG’s focus and attention will be intense and constant. Private equity management can be quite helpful; it can also be overbearing and short-sighted. And sometimes all three – which may be exactly what PMSI needs to recover its leadership position.
At risk of being accused of burying the lead, here’s what has me puzzled. Sources indicate Express looked closely at PMSI – recently . Yet they plunked down $248 million for MSC’s pharmacy business, when they could have paid a fifth of that for all of PMSI (which includes a robust ancillary services division).
PMSI has been somewhat damaged goods lately due to customer losses, yet MSC was in a similar position less than two years ago after it lost its largest PBM customer, Liberty Mutual, to rival Progressive Medical (PM had half of Liberty and was awarded MSC’s portion).
From here, it looks like a pretty good deal – although PMSI’s financials have been pretty bad lately, $50 million is a very good deal for one of the top two companies in a growing market.

So the purchase of MSC Pharmacy Services by Express Scripts will be finalized within a few weeks; what’s next?
It is way too early to tell, as the announcement hit the street just last Friday. That said, from discussions with sources from both Express and MSC Pharmacy Services it is clear that some heavy thinking has been going on for some time.
(Note I’m using MSC Pharmacy Services as that is the entity that was purchased by ESI; the other part of legacy company MSC remains ‘behind’ and will keep the MSC brand identity)
There’s the usual corporate-PR speak in the companies’ press releases, but folks involved in the discussions point to a few areas that bear watching. First out of the gate is MSC’s Oasis web portal. Their web app enables customers to access information in summary and drill down format, create reports, and keep track of specific claimants. ESI’s customers may be moved onto Oasis as systems integration efforts progress; this will not be an overnight move as it will require back- and front-end integration with customer, clinical, and processor applications.
MSC Pharmacy Services currently uses processor Restat as their network administrator; I’d expect to see the combined company move quickly onto Express’ platform and use Express’ network contracts. This would reduce MSC’s admin expense and likely improve rebate income as well.
Expect to see some consolidation of clinical programs; neither legacy company has a complete suite of services and the combined offering will almost certainly be stronger than each firm’s solo effort.
Something that has not been discussed, but has been alluded to in public statements is the possibility of cross selling ESI/MSC’s core offerings to their respective customers. This would entail ESI helping MSC sell DME, home health, imaging, etc to their customers and MSC cross selling PBM services to ESI’s customers.
Finally, while it is likely there will be a few folks looking for employment elsewhere, those decisions have not been finalized. MSC Pharmacy Services’ executive management is solid and well-regarded, as is ESI’s. I’d expect the headhunters are already circling…

Here, in no particular order, are some findings gleaned from my wanderings around the show floor at RIMS in San Diego.
MSC has rebounded nicely from the loss of Liberty Mutual’s pharmacy business last year (awarded entirely to Progressive Medical). Sources indicate MSC’s run rate is back above where it was when Liberty terminated the business, primarily from a few wins and no appreciable losses in the interim. Kudos to CEO Joe Delaney, COO Mitch Freeman et al – while the ship may not be altogether righted, they have done a remarkable job in turning the company around.
Progressive Medical is also doing well, adding some incremental business while maintaining its reputation for stellar customer service.
Cypress Care (an HSA consulting client) is on a strong growth track, closing major deals with the California Insurance Guarantee Ass’n and Pennsylvania’s state fund (SWIF). Sources indicate Cypress is close to a couple other significant deals.
Express Scripts has released its annual workers comp drug trends report. Here’s the link. Maybe that’s why all the red-shirted ESI staff were plastered with smiles.
Larry Marsh of Lehman Brothers issued a scathing report on AmerisourceBergen, taking company management to the woodshed for their inability to sell off sub PMSI/Tmesys. Marsh hammered ABC, lowering his eps forecast by $0.05 on the basis of the no-sale of PMSI alone. The PMSI folks are doing their best to ignore the goings-on at Corporate HQ; as noted earlier today their MSA division is pressing ahead and delivering solid results despite downward pressure on pricing in that fast-maturing sector.
Finally, one of the last remaining third party billers, Third Party Solutions, is reportedly on the block – again. Loyal readers (and industry geeks) will recall TPS was for sale about a year ago, with no takers. Now that TPS has bought WorkingRx, it looks like owner Fiserv is thinking someone will pony up big bucks to own a monopoly in that space.