Express Scripts Moved To Sell At Deutsche Bank, Anthem Risk Too Much To Bear

Deutsche Bank's George Hill has downgraded the rating on

from Hold to Sell, while reducing the price target from $93 to $61. Hill believes that there could be downside risk of 11 percent to the stock, from the current levels. "Given the acrimony between Express Scripts and its largest client

, we increasingly believe Express Scripts is heading towards a significant negative earnings revision as it relates to Anthem, and that the market is not fully discounting this risk," the analyst explained. Anthem believes that it is overpaying Express Scripts annually by about $3 billion. However, on checking with pharmacy benefits consultants and PBM executives, Hill estimated that $3 billion was not "out of the realm of possibility." "We estimate the figure is likely closer to $2B, and believe that Anthem may believe it is entitled to ancillary earnings streams that do not directly result from its book of business," Hill stated. One of the worst case scenarios could be that Express Scripts sees a more than $2 billion reduction in its 2016 EBITDA, leading to pro forma EPS of $4.10-$4.20. This would lead the shares to trade in the mid-$50 range, a 16-19 percent drop from the current levels. However, the analyst also believes that a more realistic scenario would be the dispute between the two companies continuing, possibly into litigation, which would results in a reduction to the 2017 estimates. At that time, an over $2 billion reduction would lead to pro forma EPS of $4.50- $4.60, "implying a share price in the low $60s, which includes 30 percent multiple expansion from current levels," according to the Deutsche Bank report.