|
|
Get Four
|  | JULY 15, 2004
By Amy Tsao A Touchy Play for Drug Investors Although pharmacy benefit managers are under fire on several fronts, analysts say their fundamentals are strong. Will that last? Recent weeks have seen plenty of negative headlines about pharmaceutical benefit managers (PBMs), which specialize in managing drug coverage for insured workers. A group of exasperated large employers has announced a buying alliance that will bypass PBMs in an effort to get better prices by dealing directly with drugmakers. State attorneys general are renewing investigations into whether PBMs pressure doctors to prescribe certain medications to benefit drug companies. And lawsuits that allege wrongdoing have been filed. Even with all this bad news, PBM stocks aren't tanking. Since the start of 2004, Medco Health Solutions (MHS ) has gained 4%, trading around $34.20 as of July 14. Express Scripts (ESRX ) is up 11%, to around $73.60. And despite having some of the most worrying news, Caremark Rx (CMX ) has risen 22%, to around $31.20. Analysts say the industry's fundamentals remain strong. Amid rising prescription-drug use by an aging population and increasing use of higher-margin generics, Weidong Huang, analyst at TimesSquare Asset Management, sees "a good opportunity to buy some of these names." Like many other analysts, Huang sees consistent earnings in the sector and 25% annual growth. (Huang's firm owns Express Scripts.) STRENGTH IN NUMBERS? The question for investors is whether the problems PBMs are facing will worsen. Most analysts seem to believe these outfits have the upper hand. For example, they're skeptical of the efforts of 50 of the country's largest companies to lower employee drug costs by eliminating PBMs. "Collectives don't work," says Huang. It takes scale to bargain effectively with drugmakers. That's what PBMs have -- and company alliances don't. The Pharmaceutical Care Management Assn., a trade group, figures PBMs handle drug coverage for 200 million people. A spokesperson for Medco says it isn't worried about such efforts and continues to see more employers hiring PBMs to manage drug benefits. In a move to lower costs significantly and helping improve margins, PBMs are aggressively pushing customers away from traditional mail-order purchasing and toward online buying. And down the road, when expanded Medicare drug coverage goes into effect, the task of handling those benefits will likely fall to the PBMs, providing another generous source of revenue. LEGAL MATTERS. Little wonder, then, that investors are shrugging off the latest developments in lawsuits and investigations. Caremark's stock slipped in early July when it said 19 state attorneys general are investigating it in relation to "consumer protection statutes, relating to business practices." The information requested by the attorneys general appears to relate to "issues that are similar to those addressed in other recent industry settlements," says Caremark spokesman Gerard Carney, referring to the Medco case that was settled earlier in the year. Medco reached agreement with 20 states over charges including allegedly pressuring doctors illegally to switch patients' medications to benefit drug companies' financials. If the Caremark case follows the precedent set by Medco, which settled for $29.3 million earlier this year, investors likely don't have to be too worried, analysts say. "Medco came out virtually unscathed," says Morningstar analyst Curt Morrison. The settlement was a pittance for Medco, which is expected to report $36.6 billion in revenues in 2004. "You have to regard these with some concern, but there's not enough at this point to run away from Caremark," Morrison says. NARROWER PROBES. After its acquisition of rival AdvancePCS last fall, Caremark more than doubled its size and is considered a strong grower for the long term. A.G. Edwards analyst Andy Speller expects earnings to rise 26% in 2004 and 32% in 2005, on revenue lifts of 185% and 32%, respectively. Those numbers are impressive, but they won't last, he says. Caremark should boost earnings by around 20% to 25% annually on a 12% to 15% annual revenue increase. Still, Caremark comes with risks. Besides the merger-integration issues and the ongoing state probes, the company is also the subject of a whistleblower case alleging, among other things, that it took returned medicine and resold it, which is illegal in many states. Caremark has denied any wrongdoing. Express Scripts should enjoy similar long-term growth without the legal issues that overhang Caremark, analysts say. Express Scripts has received letters from attorneys general and other investigators, but the breadth of the probes appears less severe. Jason Joanis, an analyst with Holt-Smith & Yates Advisors in Madison, Wis., notes that Express Scripts is trading at about 21 times 2004 earnings, compared to 19 for the benchmark Standard & Poor 500-stock index. "The price is very reasonable," he says. (Joanis personally owns shares in Express Scripts.) CONSTANT RISK. Medco, which was spun out by Merck (MRK ) in August, 2003, is the sector's largest player, but lately competitors have been stealing customers. "They have had problems over the last several years with contract renewals," Speller says. Medco has made changes to stem the loss of customers, but growth is still expected to be lower than that of its rivals. Analysts on average see Medco earnings rising by 24% in 2004 and by 7% in 2005 on single-digit revenue growth. Medco spokesperson Jennifer Leone says that contract renewals are no longer a problem. She points out that earlier in the year, Medco renewed large contracts with UnitedHealth Group (UNH ) and the state of Virginia. For the foreseeable future, investors in PBMs will need to factor in the uncertainties of investigations and lawsuits. "The controversy will always be there," says Joanis. Still, such risks may be worth taking as long as PBMs remain the prevailing force in providing drug coverage for millions of American workers.  Tsao is a reporter for BusinessWeek Online in New York Edited by Beth Belton
BW MALL
SPONSORED LINKS
| | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
