United States District Court, S.D. New York
IN RE EXPRESS SCRIPTS HOLDING COMPANY SECURITIES LITIGATION
OPINION AND ORDER
Edgardo Ramos, U.S.D.J.
consolidated putative class action arises out of the
breakdown of the business relationship between Express
Scripts Holding Company (“Express Scripts”), a
provider of pharmacy benefit services, and Anthem, Inc.
(“Anthem”), its largest customer. Lead Plaintiff,
Teachers Insurance and Annuity Association of America
(“TIAA”), an Express Scripts shareholder, asserts
causes of action individually and on behalf of others
similarly situated for violations of Section 10(b) of the
Exchange Act (and Rule 10b-5 promulgated thereunder) and
violations of Section 20(a) of the Exchange Act. Plaintiff
generally alleges that Express Scripts made false and
misleading statements in its public filings and comments
regarding the state of its relationship with Anthem.
Defendants Express Scripts, George Paz, Timothy Wentworth,
Eric Slusser, David Queller, and James M. Havel (the
“Individual Defendants, ” and with Express
Scripts, “Defendants”) bring this motion to
dismiss the Amended Class Action Complaint (the
“CAC”) for failure to state a claim. For the
reasons set forth below, Defendants' motion is GRANTED.
However, the Court dismisses the CAC without prejudice and
grants Plaintiff leave to amend.
Plaintiff TIAA brings this action individually and on behalf
of all proposed class members and entities who purchased or
otherwise acquired Express Scripts common stock between
February 24, 2015 and March 21, 2016 (the “Class
Period”). CAC (Doc. 67) ¶ 2. Defendant Express
Scripts is the largest standalone provider of pharmacy
benefit services (“PBM”) in the United States and
manages prescription drug plans for health insurers,
self-funded employers, the public sector, and government
clients. Id. ¶ 24.
Individual Defendants occupied various executive positions at
Express Scripts throughout the Class Period. Defendant George
Paz (“Paz”) was the Chairman and Chief Executive
Officer (“CEO”) of Express Scripts. Id.
¶ 18. Defendant Timothy Wentworth
(“Wentworth”) was the President. Id.
¶ 19. Defendant Eric Slusser (“Slusser”) was
Chief Financial Officer (“CFO”). Id.
¶ 20. Defendant David Queller (“Queller”)
was Senior Vice President of Sales and Account Management.
Id. ¶ 21. Defendant James M. Havel
(“Havel”) was Executive Vice President and
Interim CFO. Id. ¶ 22. In September 2015, Havel
became the Company's Executive Vice President of Finance.
Anthem and the Pharmacy Benefit Management Agreement
Scripts' largest customer is Anthem, who represented
16.3% of Express Scripts' revenue for the year ending
December 31, 2015. Id. ¶¶ 34-37. Anthem is
one of two clients that Express Scripts identifies as its
“large clients” (along with the Department of
Defense). Id. ¶ 34. As Express Scripts
recognized, including in its public filings, “[a]
substantial portion of [Express Scripts'] business is
concentrated in certain significant client contracts, ”
including with Anthem, and modification or non-renewal of its
contract with Anthem could “materially adversely
affect” Express Scripts' financial results.
Id. ¶ 35.
December 1, 2009, Express Scripts and Anthem entered into a
pharmacy benefit management agreement (the
“Contract”) pursuant to which Express Scripts
agreed to act as Anthem's exclusive provider of pharmacy
benefit management services for Anthem-administered health
insurance plans for a ten year period from 2009 to 2019.
Id. ¶¶ 26, 33.
5.6 of the Contract, titled “Periodic Pricing Review,
” provides an avenue for Anthem to renegotiate pricing
every three years. (“Section 5.6”). Section 5.6
states in full:
5.6 Periodic Pricing Review. [Anthem] or a
third party consultant retained by [Anthem] will conduct a
market analysis every three (3) years during the Term of this
Agreement to ensure that [Anthem] is receiving competitive
benchmark pricing. In the event [Anthem] or its third party
consultant determines that such pricing terms are not
competitive, [Anthem] shall have the ability to propose
renegotiated pricing terms to [Express Scripts] and [Anthem]
and [Express Scripts] agrees [sic] to negotiate in good faith
over the proposed new pricing terms. Notwithstanding the
foregoing, to be effective any new pricing terms must be
agreed to by [Express Scripts] in writing.
See Id. ¶ 28. As Defendant Paz stated
publically, such “routine” price checks give
Express Scripts' customers “the right to look at
pricing and make sure that we are doing the right things for
them.” Id. ¶ 31.
negotiations at issue here relate to the periodic pricing
reviews provided under the Contract.
The Pricing Negotiations Between Anthem and Express
and Express Scripts first renegotiated pricing in 2011-12
under Section 5.6 of the Contract. Id. ¶¶
65-69. Anthem did not believe Express Scripts had negotiated
fairly, and has since claimed that the negotiations
“unfairly resulted in Anthem paying above market
pricing for almost an extra year.” Id. ¶
68 (citing Complaint in Anthem Inc. v. Express Scripts,
Inc., No. 16-cv-2048 (ER), ECF No. 3 (March 21, 2016)
(“Anthem complaint”) ¶ 17). After
approximately one year of negotiations, Express Scripts and
Anthem agreed to revised pricing. Id. (citing Anthem
complaint ¶ 17).
commenced a second round of pricing negotiations with Express
Scripts on October 17, 2014. Id. ¶ 78. These
negotiations commenced early, as Anthem's right to
trigger periodic pricing review had not yet ripened.
Id. Specifically, Anthem demanded from Express
Scripts $13 billion in pricing concessions over the remaining
four years of the Contract, plus $1.8 billion in pricing
concessions in the post-termination period of the Contract.
Id. By December 2014, the pricing negotiations were
not resolved, and the parties had reached fundamental
disagreements about whether the contract imposed an
affirmative obligation on Express Scripts to provide Anthem
with “competitive benchmark pricing, ” and
whether Anthem's $15 billion claim reflected
“competitive benchmark pricing.” Id.
February 16, 2015, Anthem served Express Scripts with notice
of breach of the Contract. Id. ¶ 81. Anthem
sent a 14-page single-spaced letter detailing numerous
operational breaches by Express Scripts and threatening to
terminate the Contract if the alleged breaches were not
February 2015: The Class Period Begins
Class Period begins on February 24, 2015, eight days after
Anthem served Express Scripts with its notice of breach and
the day after Express Scripts filed its 2014 Annual Report on
Form 10-K with the Securities and Exchange Commission
(“SEC”). Id. ¶ 86. In the 10-K,
signed by Defendants Paz and Havel, Defendants represented:
“Customer contracts and relationships related to our
10-year contract with Anthem . . . under which we provide
pharmacy benefit management services to Anthem and its
designated affiliates are being amortized . . . over an
estimated useful life of 15 years.” Id. ¶
Thus, as Defendants explained, they were accounting for the
10-year Contract based on the assumption that it would be
renewed for an additional five years. Id. However,
in its SEC filings, Express Scripts also cautioned that
changes to significant client contracts may “materially
adversely” affect financial results or cause “a
negative reaction in the investment community”
resulting in “stock price declines or other adverse
effects.” Musoff Declr., Ex. 4 at 22.
February 25, 2015, Defendants Paz, Wentworth, Queller and
Havel held an earnings conference call with analysts. CAC
¶ 204. In response to a question from a Goldman Sachs
analyst asking for an update on the Anthem relationsip,
Defendant Queller assured investors that “we've got
a great relationship with Anthem, ” and “[o]ur
teams work closely each and every day. The relationship is
very, very, solid.” Id. Regarding the
companies' negotiations and renewal of the Contract,
Queller stated that “it's business as usual. And we
look forward to having them as a client through the end of
the contract term which is at the end of 2019 and we'd
love to have them for a longer time as well. But we'll
continue to work with them very, very closely just as we
always do to make them successful.” Id.
Throughout the first quarter of 2015, Express Scripts and
Anthem continued to negotiate over pricing and the alleged
March - May 2015: Anthem's Second Notice of
Section 16.5 of the Contract, before a party can exercise a
termination right, the parties must first submit material
contractual disputes to a Joint Operating Pharmacy Committee
(“JOPC”), which has 15 days to meet in person and
make a good faith effort to resolve the dispute. Id.
¶ 85. If the JOPC does not resolve the dispute,
it must then be referred to the Presidents of Express Scripts
and Anthem. Id. If the Presidents' meeting is
not successful, the parties must then refer the dispute to
non-binding mediation. Id. As described more fully
below, the parties engaged in these steps, but were unable to
resolve the disputes related to pricing and operational
breaches. Id. ¶¶ 93, 104, 130.
March 18, 2015, Anthem reiterated its demand that Express
Scripts lower its pricing, provided Express Scripts with
proposed new pricing terms, and requested a response by March
30, 2015. Id. ¶ 94. Express Scripts did not
meet Anthem's demands, and on April 1, 2015, Anthem
provided Express Scripts with a second formal notice of
breach that, pursuant to Section 6.2(a) of the Contract,
Express Scripts was required to cure before June 22, 2015.
Id. ¶ 95.
April 29, 2015, Defendants Paz, Havel, and Wentworth held an
earnings conference call during which, in response to an
analyst's question, Defendant Paz assured investors that
“Anthem is an incredibly important client to us,
” “we really enjoy that relationship, ” and
“I do think it is a two-way street.” Id.
27, 2015, the companies' Presidents met-the second step
in the dispute resolution procedure in the Contract-but again
failed to reach agreement. Id. ¶ 104. On June
22, 2015, Express Scripts rejected Anthem's proposal that
was first communicated on March 18, 2015. Id. ¶
106. In the process, Anthem and Express Scripts both accused
the other of failing to negotiate in good faith. Id.
September 9 and 10, 2015, Express Scripts announced that
Defendant Paz would step down as CEO,  but would remain
on the Company's board of directors as non-executive
Chairman, Defendant Wentworth (then President) would succeed
Paz as CEO, and Defendant Slusser would be appointed
Executive Vice President and CFO. Id. ¶¶
September 15, 2015, the parties met again, and Anthem again
accused Express Scripts of refusing to negotiate in good
faith. Id. ¶ 122. The parties did not agree on
a proposal for competitive benchmark pricing at the meeting.
Id. Thereafter on two occasions, October 2 and
October 19, 2015, Express Scripts contacted Anthem, but
Express Scripts did not negotiate regarding pricing.
Id. On October 27, 2015, Express Scripts filed its
third quarter 2015 Form 10-Q, which continued to represent
that the Contract had a “high probability” of
renewal for at least five years. Id. ¶
November - December 2015: Mediation is Unsuccessful
November 5, 2015, Anthem asked Express Scripts to meet, but
Express Scripts did not agree to a meeting. Id.
¶ 129. On November 9, 2015, as the third and final step
in the Contract's conflict-resolution procedure, the
companies held a mediation, but the mediation was
unsuccessful. Id. ¶ 130. Subsequently, on
November 11 and November 23, 2015, Anthem contacted Express
Scripts to schedule a meeting, but Express Scripts declined
to meet. Id. ¶ 131-32.
December 2, 2015, Anthem sent Express Scripts a revised
pricing proposal that outlined what Anthem believed was
Defendants' failure since March 18, 2015 to negotiate
competitive benchmark pricing as required, including
Anthem's position that “the current pricing terms
of the [Contract] [a]re not even close to competitive.”
Id. ¶ 134. Anthem again asked Defendant
Wentworth on December 14, 2015 whether Express Scripts
“was willing to reconsider its position that it is not
required to offer Anthem competitive benchmark
pricing?” and further requested a “meeting among
the decision-makers.” Id. ¶ 135. The next
day, Express Scripts responded to the Anthem's letter and
refused to meet, stating that it was under no obligation to
negotiate Anthem's pricing proposal and could veto any
such negotiation. Id. ¶ 136. Express Scripts
further stated that it would not respond to Anthem's
December 2 revised pricing proposal for another two weeks.
Id. On December 17, 2015, Anthem responded that
Express Scripts “already had nine months to consider
the pricing issue and certainly must know its
intentions.” Id. ¶ 137.
December 22, 2015 Investor Conference Call
December 22, 2015 Express Scripts held a conference call with
investors regarding financial guidance for 2016 and discussed
the Anthem negotiations. Id. ¶ 138. During the
call, Paz stated that Express Scripts was “currently in
discussions with Anthem regarding the periodic pricing
provisions of the agreement, ” and that “[w]e are
excited to continue productive discussions with Anthem
regarding our relationship.” Id. ¶ 226.
During the same call, in response to an analyst's
question, Paz stated that the discussions were “very
early on.” Id. Paz also claimed that Express
Scripts' practice was to “sit down” with its
client and “identify opportunities for
savings.” Id. ¶ 139. Paz also reiterated
that the Anthem relationship was unique:
We are currently in discussions with Anthem regarding the
periodic pricing review provisions of the agreement. We
previously engaged in this review process in 2012 and
following several months of discussions that process
ultimately resulted in a mutually beneficial agreement
between both Express Scripts and Anthem, because of the
nature of the transaction with Anthem in 2009, their contract
is unique within our book of business. Specifically the
pricing review provided for in the Anthem agreement is unlike
traditional provisions that exist elsewhere in the industry.
Musoff Declr., Ex. 14 at 3; see also CAC ¶
same time, Paz warned investors of risks with respect to the
outcome of negotiations regarding the Contract, including the
financial terms and the likelihood of renewal:
▪ “[T]here are any number of factors that could
influence the terms and breadth of any financial agreement
between the parties.” Musoff Declr., Ex. 14 at 3.
▪ “Based on the range of variables that could
influence our discussions with Anthem, we are unable to
provide a timetable or the likely financial terms of the
successful negotiation at this time.” Id.
▪ “[W]e hope that as part of this whole - working
through this contract will also be an extension of time, but
that's still up to the parties to negotiate.”
Id. at 4.
▪ “[W]e would love to get an extension as part of
this negotiation, but that's [sic] remains to be seen at
this juncture.” Id. at 7.
respect to the Contract, Wentworth stated,
“[T]here's just way too many variables in play
which could impact how any new agreement with Anthem is
structured for us to make a timetable or a financial impact
for any of these arrangements at this time.”
Id. at 8.
January - February 2016: Negotiations Continue and
Information Becomes Public
January 7, 2016, Express Scripts sent Anthem a
counterproposal that lowered pricing by $1 billion (or less
than 8% of the $13 billion that Anthem had demanded since
October 2014), but increased prices overall by charging over
$1 billion for the post-termination transition period. CAC
¶ 143. Anthem went public with the dispute less than one
week later. Id. Specifically, on January 12, 2016,
Anthem's CEO stated publically during a healthcare
[W]e are entitled to improved pharmaceutical pricing that
equates to an annual value-capture of more than $3 billion.
To be clear, this is the amount by which we would be
overpaying for pharmaceuticals on an annual basis. . . .
While our repricing provision was effective over a month ago,
we do not yet have an agreement with our current vendor to
effectuate the savings. We have not yet received an offer
from [Express Scripts] that we believe represents
market-competitive benchmark pricing. We're now trying to
get them to engage in good faith negotiations as required
under the terms of the repricing provision in our contract.
To be clear, our shareholders are entitled to that value
today and our team has been and continues to be focused on
exercising our contractual rights to capture that value.
Id. ¶ 144. Anthem's General Counsel told
reporters that Anthem was contemplating litigation against
Express Scripts, stating, “Do I sit here and overpay
$3B a year? Or do I go file a lawsuit saying
‘you've breached the agreement' by not giving
the competitive pricing that Anthem is due?”
Id. ¶ 145. Express Scripts common stock
declined the next day and for three consecutive trading days
thereafter-January 13, 14, 15 and 19, 2016. Id.
January 13, 2016, one day after Anthem went public with the
dispute, Anthem made a counterproposal to Express Scripts
“[i]n the interest of getting to a resolution, . . . to
accept less than competitive benchmark pricing.”
Id. ¶ 162. Express Scripts did not respond.
Id. On January 22, 2016, Anthem again proposed a
resolution to Express Scripts, and Express Scripts again
refused to negotiate. Id. ¶ 166. Four days
later, on January 26, 2016, Express Scripts informed Anthem
that it was not obligated to renegotiate Anthem's
January 27, 2016, Anthem explained the nature of the dispute
in its earning call:
[W]e believe we have set the table now for conversations in
and around the possibility of recasting our pricing
relationship with [Express Scripts]. So all I can tell you at
this stage is that dialogue will continue and we're
hopeful that still in 2016, we will reach a resolution to
this matter that we are engaged in with [Express Scripts].
Musoff Declr., Ex. 23 at 9.
February 3, 2016, Anthem representatives traveled to St.
Louis to meet with Defendant Wentworth and to offer a pricing
reduction of $9.7 billion, or $3.4 billion less than the
$13.1 billion Anthem had previously demanded. CAC ¶ 170.
Express Scripts did not engage, and denied that it had any
obligation to do so. Id. On February 5, 2016, Anthem
submitted the same proposal in writing, telling Express
Scripts that it had now spent “almost one year”
trying to engage Express Scripts and that the current drug
pricing terms were “unsustainable, ” and
stressing that “Anthem cannot continue under [Express
Scripts'] current pricing, so please respond to
Anthem's proposal by next week.” Id.
¶ 171. On February 12, 2016, Express Scripts responded
with the same proposal it had previously sent on January 7,
2016, which lowered pricing by only $1 billion. Id.
Company's 2015 Form 10-K, filed on February 16, 2016,
Defendants stated that Express Scripts was “currently
in discussions with Anthem regarding the periodic pricing
review process pursuant to the terms of our [contract] with
Anthem, ” and further reassured investors that
“we are actively engaged in good faith discussions with
Anthem and intend to continue to comply with the requirements
of the agreement.” Id. ¶ 231. Express
Scripts also identified challenges associated with predicting
the outcome of the negotiations, stating: “At this time
we are unable to provide a timetable or an estimate as to the
potential outcome of these events, any of which could result
in a material adverse effect on our business and results of
operations.” Musoff Declr., Ex. 5 at 21.
February 17, 2016 conference call with analysts, Defendant
Paz told investors that Express Scripts “remain[ed]
fully committed to good faith negotiations in hopes of
reaching a mutually beneficial agreement within the framework
of our 2009 contract. That has not changed.” CAC ¶
232. Paz further stated that Express Scripts was
“focused on reaching agreement.” Id. Paz
also reiterated the position disclosed in December 2015 that
any extension of the Contract beyond the ten-year term would
depend on the outcome of the parties' negotiations,
stating, “[O]bviously we would love to have an
extension as part of this agreement. And I think it's up
to us to negotiate with them and find out what's
tolerable and works for them and what's good for us and
our shareholders.” Musoff Declr., Ex. 15 at 11.
March 2016: The Anthem Complaint
CEO traveled to a meeting in Chicago, IL on March 1, 2016
with Paz, and an additional round of counterproposals
occurred. CAC ¶ 176. Express Scripts presented a
previously rejected proposal, and the parties did not reach
resolution. Id. On March 21, 2016, the last day of
the Class Period in the instant action, Anthem commenced
litigation against Express Scripts with the filing of a
complaint in this Court (the “Anthem
Litigation”). Id. ¶ 178. In its
complaint, Anthem revealed publicly for the first time that
it had attempted to renegotiate drug pricing since early
2015, that negotiations with Express Scripts had never
approached resolution, and that Anthem believed that Express
Scripts had violated its operational obligations under the
Contract. Id. ¶ 179. The Anthem complaint also
revealed that Anthem had served Express Scripts with notices
of breach on February 16, 2015 and April 1, 2015 concerning
the Company's pricing and alleged operational
obligations. Id. ¶ 180. On March 22, 2016, the
market price of Express Scripts common stock declined $1.82,
to close at $67.52 per share. Id. ¶ 187.
April 19, 2016, Express Scripts countersued Anthem in the
Anthem Litigation, raising its own breach-of-contract claims.
Id. ¶ 188. Express Scripts alleged
“repeated failures” by Anthem “to comply
with its contractual obligation to negotiate in good faith,
” called Anthem's demand “unreasonable,
” accused Anthem of breaching the implied ...