UBS Financial thinks the news that First DataBank is lowering average wholesale prices for more than 2,000 drugs could hurt earnings for Express Scripts, Caremark Rx, and Medco
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Pharmacy benefit managers got hit on Oct. 9 after UBS Financial downgraded Express Scripts (ESRX), Caremark Rx (CMX), and Medco Health Solutions (MHS) to neutral from buy. This was related to the Oct. 6 news that First DataBank, a publisher of prescription drug prices, agreed to lower prices on its list.
List publisher First DataBank, a unit of Hearst Corp., is required to reduce average wholesale prices (AWPs) by 5% for about 2,033 drugs. First DataBank has played a powerful role in determining what Americans pay for prescription drugs given that it publishes lists of drug prices used as a benchmark in determining what health plans and state Medicaid programs pay pharmacies, according to Dow Jones Newswires.
First DataBank's list accounts for about 49% of branded sales, 45% of mail order, and 45% of retail sales of drugs, says UBS analyst Ricky Goldwasser.
Goldwasser says that lower AWPs, which are used as a reimbursement benchmark for pharmacy benefit managers (PBMs), should have a negative impact on the companies' bottom line. Ultimately, the impact will depend on the percentage of contracts that contain provisions to protect PBMs, he says.
While PBMs should still benefit from the opportunity to profit from sales of generic drugs, Goldwasser thinks AWP changes will offset the upside. He feels the risk-reward landscape has changed and he sees risk for additional downside potential, even after the shares declined on Friday.
The analyst lowered his price targets on the three stocks; Express Scripts was lowered to $81 from $98, Caremark to $58 from $71, and MedcoHealth to $66 from $74.
Shares of Express Scripts fell 5% to $68.67, Caremark Rx lost 4% to $51.03, and Medco declined 3% to $55.23 during trading.
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