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In re Express Scripts Holding Co. Securities Litigation

United States District Court, S.D. New York

July 31, 2017

IN RE EXPRESS SCRIPTS HOLDING COMPANY SECURITIES LITIGATION

          OPINION AND ORDER

          Edgardo Ramos, U.S.D.J.

         This 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.

         I. BACKGROUND [1]

         A. The Parties

         Lead 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.

         The 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. Id.

         B. Anthem and the Pharmacy Benefit Management Agreement

         Express 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.[2]

         On 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.[3]

         Section 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.

         The negotiations at issue here relate to the periodic pricing reviews provided under the Contract.

         C. The Pricing Negotiations Between Anthem and Express Scripts

         Anthem 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).

         Anthem 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. ¶ 80.

         On 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 cured. Id.

         D. February 2015: The Class Period Begins

         The 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. ¶ 87.[4] 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.

         On 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 operational issues.

         E. March - May 2015: Anthem's Second Notice of Breach

         Under 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.[5] 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.

         On 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)[6] of the Contract, Express Scripts was required to cure before June 22, 2015. Id. ¶ 95.

         On 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. ¶ 211.

         On May 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.

         On September 9 and 10, 2015, Express Scripts announced that Defendant Paz would step down as CEO, [7] 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. ¶¶ 118-19.

         On 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. ¶ 223.[8]

         F. November - December 2015: Mediation is Unsuccessful

         On 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.

         On 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.

         G. December 22, 2015 Investor Conference Call

         On 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 ¶ 138-39.

         At the 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.

         With 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.

         H. January - February 2016: Negotiations Continue and Information Becomes Public

         On 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 conference:

[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. ¶¶ 147-60.

         On 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 pricing. Id.

         On 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.

         On 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.

         In the 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.

         On a 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.

         I. March 2016: The Anthem Complaint

         Anthem's 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.

         On 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 ...


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