Anthem Will Account For 21%-22% Of Express Scripts' Scripts In 2016, Says Morgan Stanley

Health insurer Anthem Inc ANTM is expected to account for 21-22 percent of the scripts of Express Scripts Holding Company ESRX in 2016, according to a report from Morgan Stanley.

Express Scripts shares have dropped 19 percent this year, mainly driven by the contract dispute with one of its biggest clients, Anthem. Anthem has warned that it may ditch Express Scripts for a rival unless it can deliver $3 billion a year or more in savings on drug prices.

Though the move will benefit Anthem's earnings, investors might be worried about the impact on Express Scripts as it is being speculated that Anthem may move to CVS Health Corp CVS. If Express Script loses Anthem, it would unseat Express Scripts as the country's biggest prescription drug benefits manager.

Analyst Ricky Goldwasser said Anthem/Express re-pricing could bridge the profitability gap. If Express were to price the contract at market levels after term expiration, it would yield a decrease in EBITDA/adj.script of $0.80 to $1.00 in today's terms.

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"Express Scripts and CVS profitability per script has diverged to its widest level in 7 years. Since 2009, the gap in EBITDA per script has grown larger with CVS decreasing 8% and Express Scripts increasing 75%," Goldwasser wrote in a note to clients.

Key inflection points over the past seven years include 2011/12 when CVS on boarded lower margin Aetna, FEP, and UAM Medicare contracts, and 2013 when Express acquired Medco and offloaded lower margin UnitedHealth scripts.

For CVS, EBITDA per adjusted script troughed in 2011, and has grown 31 percent since then despite an Aetna repricing in 2014. Over that same time period -– 2012 through 2015 -– Express Scripts EBITDA per adjusted script growth rate has exceeded CVS' by 118 bps to 375bps per year.

"In 2016, taking into account the guidance from the management teams, the gap in growth is expected to expand to ~830bp (based on midpoint of guidance), reflecting CVS onboarding Omnicare and ~$9billion of new health plan business," Goldwasser added.

Morgan Stanley has an Equal-Weight rating on Express Scripts with a $73 price target and an Overweight on CVS Health with a price target of $111.