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Health insurer Anthem Inc (NYSE: ANTM) is expected to account for 21-22 percent of the scripts of Express Scripts Holding Company (NASDAQ: 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 (NYSE: 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.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.
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