LDN - Health and Fitness

Pharma's middlemen see shares suffer as challenges grow

[July 26, 2018] By Lewis Krauskopf

NEW YORK (Reuters) - Uncertainty over potential actions to reduce prescription drug costs and competitive threats have taken a toll this year on shares of companies in the U.S. pharmaceutical supply chain. They get their chance to change investor sentiment with quarterly earnings reports in the coming days.

Prescription drug wholesalers, drug store chains and pharmacy benefit managers generally have seen their stock prices tumble this year, even as the overall S&P 500 healthcare sector <.SPXHC> has gained 6 percent.

Six S&P 500 stocks - CVS Health Corp <CVS.N>, Walgreens Boots Alliance Inc <WBA.O>, AmerisourceBergen Corp <ABC.N>, McKesson Corp <MCK.N>, Cardinal Health Inc <CAH.N> and Express Scripts Holding Co <ESRX.O> - collectively recently traded a third below their average valuation of the past five years, based on price-to-earnings estimates, according to Thomson Reuters Datastream.

"It’s the uncertainty related to the business model itself that is causing the steep discount in valuations," said Jefferies analyst Brian Tanquilut.

Fears the U.S. government will take actions to rein in prescription drug prices, an issue trumpeted by U.S. President Donald Trump, have cast a cloud over the stocks.

Just last week, the shares were rattled as the Trump administration proposed a rule to scale back protections that allow rebates between drug manufacturers and insurers and pharmacy benefits managers, among the industry's so-called middlemen.

Amazon's <AMZN.O> designs on health care, in particular its planned acquisition of online pharmacy PillPack, also are pressuring the stocks, as are moves by drugmakers such as Pfizer Inc <PFE.N> and Merck & Co <MRK.N> to cut some drug prices or roll back increases.

"This space is incredibly difficult to analyze and we can’t in good conscience recommend fresh investment, despite low valuations," Eric Coldwell, an analyst at Robert W. Baird, said in a research note last week. Coldwell downgraded his ratings to "neutral" on shares of McKesson, Amerisource and Express Scripts.

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For the graphic 'Prescription needed: U.S. pharma supply stocks in 2018', click - https://reut.rs/2LC62qj

McKesson, which reports results on Thursday with other companies following in next two weeks, has had its shares fall about 15 percent this year. Shares of rival drug wholesalers, Amerisource and Cardinal, have fallen nearly 9 percent and 20 percent, respectively. Drug store chains CVS and Walgreens have dropped about 9.5 percent each. CVS is also a large pharmacy benefit manager (PBM).

Express Scripts shares have climbed more than 6 percent this year. The PBM's stock price has benefited from the company's March agreement to be bought by insurer Cigna Corp <CI.N>. Even so, the stock recently traded at only 8.3 times earnings estimates for next 12 months, a discount to its five-year average of 12 times.

The cheaper valuations are drawing the attention of some investors who believe the selling appears overdone.

Jeff Jonas, a portfolio manager who focuses on healthcare for Gabelli & Co, has been buying shares of Amerisource. "The wholesalers in particular are always going to have a role to play," he said.

"We have just had too many issues of counterfeit or tampered drugs over the years," Jonas said. "So I think having these well-monitored, well-controlled supply chains is still pretty important.”

(Reporting by Lewis Krauskopf; Editing by Alden Bentley and Bill Berkrot)

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