Post-UNH Deal, Spotlight on Pharmacy Benefit Stocks – Analyst Blog

Health insurers may start thinking about adding pharmacy benefit managers to their portfolio following the news that a unit of UnitedHealth Group UNH is taking over Catamaran Corp. CTRX.

Role of Pharmacy Benefit Management

Pharmacy benefit management (PBM) services, or pharmacy benefit managers, primarily work towards lowering drug prices for consumers, and hence reduce medical costs for insurers by negotiating with pharmaceutical companies for better prices, rebates and discounts. This feature of a PBM is drawing the attention of health insurers to rope them in for their benefit.  

The increasing costs of drugs are directing health insurers to turn to PBMs to manage their medical costs. For example if an insured customer buys Sovaldi® or Harvoni™ – two Gilead Sciences Inc. GILD drugs that cost more than $80,000 each for a full course of treatment – the medical costs for the company which covers the insured will automatically shoot up.

Rising medical costs directly hit the bottom line of health insurers. Notably, prescription-drug spending increased more than 12% in the U.S. last year, the biggest annual increase in more than a decade, according to a report by Express Scripts. Moreover, Gilead’s pricey drug Sovaldi compounded medical costs for health insurers last year.

Sector Looking Attractive

The PBMs are commanding attention as they help in reducing U.S. medical costs, a goal of the 2010 ACA healthcare reform law, partly by extracting lower prices from drug makers and tracking whether patients take their medicine. In the coming years, PBMs are expected to benefit from an aging U.S. population, prevalence of chronic disease, increased life expectancy and growing concerns about skyrocketing pharmaceutical costs.

The drug-benefits industry generates about $100 billion in annual sales, a figure that may increase fourfold by 2020, according to sources. In its annual report, CVS Health Corp. CVS said that the overall specialty market is projected to reach $235 billion and 50% of total drug spending by 2018 compared with just 38% in 2014, as utilization of costly new therapies increases.

Hepatitis C drugs such as Sovaldi® and Harvoni™ as well as PCSK9 inhibitors, an anticipated new class of drugs for lowering cholesterol, are notable examples of high-cost therapies expected to expedite growth in specialty pharmacy. Demand for PBM services are directly proportional to the increase in drug prices, which implies that when healthcare costs rise, so will the demand for PBM services.

Notable Consolidations in the Sector

PBMs manage drug pricing more effectively when they are bigger in size and scale. This is the prime reason for the aggressive consolidation in the sector.

Over the past five years, major players have aggressively acquired smaller companies in an attempt to increase their retail pharmacy network, brace up their bargaining power with drug manufacturers and widen the customer base. This has resulted in a wave of mergers and acquisitions which eliminated small players and gave birth to big ones. While Express Scripts Co. ESRX is the top player (as per revenue) and CVS Health is the next in rank, the buyout of Catamaran will place UnitedHealth as the third-highest player in the industry.

Other deals seen in the PBM industry include the announcement by Rite Aid RAD to acquire Envision Pharmaceutical Services for $2 billion.

Express Scripts became the nation’s largest PBM in 2012 after it took over Medco Health Solutions for $29.1 billion. In Mar 2007, Caremark Rx, Inc. merged with CVS Health to form the nation’s premier integrated pharmacy services provider.

Stocks Worth a Look

Growth prospects for PBMs are strong as rising drug costs, higher consumer spending on healthcare and increasing prescription drugs will continue to drive up revenues for PBMs. We believe that these trends bode well for the industry’s top players.

Our first pick would be Express Scripts Holding Company. Founded in 1986, St. Louis, MO-based Express Scripts is the largest PBM in North America. The company provides a full range of services to its clients, including health maintenance organizations (HMOs), health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs.

In the last reported quarter, Express Scripts delivered a positive surprise of 0.72% and is expected to pull another one when it reports its first quarter 2015 earnings as it has the right combination of Zacks Rank #3 (Hold) and Earnings ESP of 0.91%. Management estimates earnings per share for the first quarter in the $1.07–$1.11 band.

Another company in focus is CVS Health. Headquartered in Woonsocket, RI, CVS Health is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. In the last reported quarter, operating net earnings per share came in line with the Zacks Consensus Estimate. Management expects adjusted earnings in the range of $1.06 to $1.09 per share in the first quarter of 2015.

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RITE AID CORP (RAD): Free Stock Analysis Report
 
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
 
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Source Article from http://finance.yahoo.com/news/post-unh-deal-spotlight-pharmacy-150603564.html
Post-UNH Deal, Spotlight on Pharmacy Benefit Stocks – Analyst Blog
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