Morgan Stanley Gives Bear/Base/Bull Cases For Express Scripts After Humana Rumor

In a report published Tuesday, Morgan Stanley analyst Ricky R Goldwasser reiterated an Overweight rating on

, after reports said that

could be for sale and cited

as a potential suitor. Humana's PBM business represents a "unique opportunity" for Anthem. Anthem accounts for about 14 percent of Express Scripts' revenue and about 17 percent of EBITDA. Therefore, investors are concerned about the expiry of the contract in 2019. Humana has its own PBM business, while Anthem outsources these services to Express Scripts, according to a 10-year agreement that commenced in 2009. The Bear Case - "Anthem moves its volume to the Humana platform when the deal expires in 2019. Under this scenario we estimate a ~17% EBITDA headwind or ~$1.21 to Express' 2020 earnings per share. While ESRX's multiple already implies some Anthem renewal risk in our view, if this scenario were to play out, shares would likely be down >10%," analyst Ricky R Goldwasser wrote. The Base Case - "Anthem transitions to an administrative model…where Express would provide back-office administrative/adjudication functions. For Express, this option would include an earnings headwind from lower margin on the Anthem business, somewhat offset by a pick-up in administrative volumes from Humana," Goldwasser said. This scenario could translate to a headwind of 11 percent on net EBITDA or about $0.75 per share. Although this would be dilutive to Express Scripts' earnings, the removal of the contract could eliminate the overhang on the company's stock. The Bull Case - "Anthem expands its current service relationship with Express to include volume from Humana at a reduced price. In our analysis we assume that if this scenario were to materialize, Anthem pricing could be reduced by as much as ~50% to account for the new scale and market pricing. Netting reduced pricing with the incremental gain of Humana's volume we think the EBITDA impact of this scenario would be neutral, albeit dilutive to margin profile. If the bull case were to materialize, ESRX shares would likely rally on a removal of an overhang," the report added.