CVS Slides After Rating Cut On Remuneration Fees Exposure
Shares of CVS Health (CVS) are sliding after Baird analyst Eric Coldwell downgraded the stock to Neutral, voicing concern over the company's exposure to Direct and Indirect Remuneration, or DIR, fees. This follows a white paper on the Pharmacy Benefit Managers, or PBMs, use of DIR fees by Frier Levitt, claiming PBMs have driven up drug costs with "murky" DIR fees that "lack any reasonable transparency" and "increase the cost of drugs to Medicare and beneficiaries."
NEGATIVE ON CVS: In a research noted this morning, Baird's Coldwell downgraded CVS Health to Neutral from Outperform, saying fundamentals are not good and noting that the company's exposure to DIR fees is what concerns him most. Moreover, the analyst told investors that he would recommend selling the shares but for the strong cash flow and potential outsized benefits it might see under corporate tax reform scenarios. Coldwell pointed out that his healthcare supply chain concerns have mounted since early November, while saying that DIR fees may become the top issue in 2017 and beyond. Acknowledging that recent reports from CMS and Frier Levitt have forced his conclusion on CVS a bit sooner than desired, the analyst noted that what has become more concerning to him is how much CVS's aggressive approach with DIRs might have been propelling the Pharmacy Benefit Management segment performance and masking Retail/LTC underperformance. Additionally, Coldwell expressed concern over how much CVS might be earning from DIRs and what the risk might be if there is intervention. Beyond DIRs, the analyst noted he is concerned over severe deleveraging on volume losses to Walgreens (WBA), incessant reimbursement pressures, waning competitive advantage, increasing competitive dynamics, a sluggish Rx market, and retail and consumer headwinds. However, these items are largely known and baked into disappointing outlooks already issued by CVS for Q4 and 2017, he contended.
PBM USE OF DIR FEES: In a white paper on PBMs use of DIR fees commissioned by the Community Oncology Alliance, law firm Frier Levitt noted that 2016 was a year of intense debate as the media, public, and legislators began to recognize that PBMs "may actually be causing higher drug prices as they become an increasingly large part of the national health care system." According to the report, one way in which PBMs have driven up drug costs are with "murky" DIR fees charged to providers who dispense drugs, such as retail and specialty pharmacies and physician-run medical practices that operate retail pharmacies or dispensing facilities. "DIR Fees charged by PBMs to Pharmacy Providers lack any reasonable transparency, threaten the viability of Pharmacy Providers, and, most importantly, increase the cost of drugs to Medicare and beneficiaries," the white paper concludes.
CAUTIOUS REPORT ON EXPRESS SCRIPTS: Last week, Andrew Left's Citron Research posted a new cautious report about PBM Express Scripts (ESRX) on its website. The short-selling research firm argued that Express Scripts is one company that "deserves to fall to the mighty sword of the new Trump administration," saying that its rebate system is "a financial engineering kickback scheme." Calling the company "The John Gotti of the Pharmaceutical Industry," Citron Research claimed that the percentage of pharma spending Express Scripts "extracts from rebates is far greater than its peers, and expanding," as it diverts "huge cash flows" from companies that actually invest in innovative R&D into "kickbacks" for itself. Therefore, if Express Scripts loses 50% of its rebates under the Trump administration, "they lose 30% of EPS, and the stock goes straight to $45," the short-selling research firm contended.
PRICE ACTION: In afternoon trading, shares of CVS Health have dropped over 3% to $75.44, while Express Scripts is down over 4% to $66.07 per share.
Disclosure: None.