Rite Aid faces a class-action lawsuit over its pharmacy benefits subsidiary

When Rite Aid dropped roughly $2 billion in 2015 to buy its pharmacy benefit management (PBM) subsidiary now known as Elixir, the company had framed the investment as a strategic move to compete in the healthcare marketplace among rivals like CVS and Walgreens.

The deal quickly helped make Rite Aid $4.1 billion in its newly formed pharmacy services segment—including Elixir and other pharmacy services, according to the company—bolstering its financial standing the next fiscal year. Maybe it would no longer be the ugly duckling next to the cooler, sleeker swans.

It seemed to be working—for a while at least. But by 2018, analysts were recommending Rite Aid sell off Elixir to reduce the parent company’s debt. Still, Rite Aid stuck with Elixir in hopes of boosting its competitiveness in the retail pharmacy scene.

This year, Rite Aid President and CEO Heyward Donigan was still painting a rosy picture of Elixir, saying in earnings calls that the PBM was gaining more members and Elixir’s operating margins were improving.

But a month after its latest earnings call in September, Rite Aid was hit with a class-action lawsuit accusing the company of making “false and/or misleading statements” to investors about Elixir’s status between April and September of this year.

Here’s the breakdown

Several firms specializing in securities class-action cases filed the lawsuit against Rite Aid on Oct. 19, which claims the company made “materially false and misleading statements” between April 14 and Sept. 28, 2022. The suit is open to anyone (besides the defendants) who purchased Rite Aid securities between those dates.

While Rite Aid said in April that it was reaching upward of “a million members” in its 2023 sales pipeline, the lawsuit alleges that the number of Elixir members for the selling season was actually declining. In Rite Aid’s Sept. 29 press release announcing Q2 results for FY 2023, the company said there was a “planned loss of covered lives at Elixir.” The company also reported that the pharmacy services segment’s revenues for the quarter were down 9%, or roughly $171 million, from the previous year.

This past April, Donigan said Rite Aid had already gained 35,000 new Elixir members in the previous few months, compared to 55,000 in the prior year. By June, Donigan said Rite Aid had added 80,000 new lives for the start of 2023, which was “more new lives than we sold last year.”

Catherine Carter, a spokesperson for Rite Aid, declined to share the number of Elixir members and clarify the time period in which Donigan claimed the PBM’s membership grew, saying the company does “not comment on pending litigation.”

The suit claims that Rite Aid failed to disclose that the number of Elixir members was declining. The allegedly inflated member numbers and other omissions might have prompted "a reasonable investor" to overvalue Rite Aid's investments. According to a 10-K form Rite Aid filed with the SEC on April 25, 2022, Elixir covers a total of more than 2 million members.

Rite Aid EVP and CFO Matt Schroeder said during the Sept. 29 earnings call that the company paid a $252.2 million goodwill impairment charge “related to Elixir.”

A goodwill impairment charge basically means Rite Aid acknowledged that the value of Elixir decreased—a fact that seems to have set off the alarm and triggered the lawsuit.

According to one securities lawyer with knowledge of the case, when a company owns a subsidiary like Elixir, it is required by law to account for its value, or goodwill. In this case, Rite Aid must report in the financial statements it gives to investors what Elixir’s value is, and if the value is “impaired,” i.e., it goes down for any reason.

Wait, explain what a “PBM” is one more time

A PBM negotiates with drug manufacturers to create formularies, which are lists of drugs insurers cover. PBMs play a part in setting drug prices, and contract with pharmacies to reimburse them for dispensing drugs on the formularies.

It can be a profitable business.

CVS bought its PBM called Caremark in 2007. By 2015, Caremark was already managing around 1 billion prescriptions per year—nearly one-quarter of the prescriptions filled in the US that year alone. Walgreens sold off its PBM in 2011, but in 2015, the retail pharmacy made nearly four times Rite Aid’s annual revenue without it.

Elixir, which was originally known as EnvisionRxOptions before Rite Aid rebranded the PBM in 2020, was part of a strategic push to grow Rite Aid’s business. At the time, Donigan told Forbes that “the key metric of success […] will be the number of covered lives in our PBM business.”