Pharmacy benefit managers are feeling the squeeze

The specter of banishing back-end drug rebates and more aggressive state action has unnerved pharmacy benefit managers heading into 2019.

The big picture: This uncertainty has PBMs on the defensive and appears to be chipping away at their profitable businesses.

Driving the news: It has not been a fun few weeks for the drug pricing middlemen.

• CVS Health rolled out profit estimates for 2019 that were well below what Wall Street had expected, due in part to its PBM proactively passing more rebate dollars to employers and insurers. Executives also said CVS won't keep as much money on some generic drugs through a practice known as "spread pricing."
• Cigna CEO David Cordani recently said the Trump administration's proposed rebate rule would "not have a meaningful impact on our growth or earnings trajectory," even now that the company has acquired Express Scripts. But analysts are not convinced.
• Diplomat Pharmacy lost a lot of employer customers within its recently acquired PBM business, and it anticipates writing down a "significant portion" of the PBM's $630 million value.
• Activist investor Starboard Value is breathing down the neck of Magellan Health, which owns a PBM with $2.5 billion of annual revenue, and is encouraging a sale due to the company's "poor performance."

That's not all: States continue to be the most aggressive force challenging PBMs.

• Ohio's attorney general wants to claw back "overcharges" from OptumRx, and Kentucky criticized its drug benefit companies for retaining almost $124 million last year through spread pricing.

The bottom line: The rebate rule and general scrutiny on PBMs "poses meaningful risk to [their] profit models," analysts at Robert W. Baird & Co. wrote in an investor note last week.

Yes, but: The rebate rule likely won't go into effect for a while, and these companies are not going to sit on their hands.

• If the rebate rule is implemented, UnitedHealthGroup, which owns OptumRx, "would adjust accordingly," and it helps that Medicare Part D — which the rule would affect — is "a relatively small part" of UnitedHealth, Cantor Fitzgerald analyst Steven Halper wrote to investors after meeting with the company's top executives.