Morgan Stanley Upgrades Anthem, Sees Opportunity In Pharmacy Benefit Manager Shakeup

Mergers and regulated pricing reform have shaken the pharmacy benefits management space — and the chaos may play out in Anthem Inc ANTM’s favor.

The Analyst

Morgan Stanley analyst Zack Sopcak upgraded Anthem from Equal-weight to Overweight and increased the price target from $273 to $368.

The Thesis

By Sopcak’s estimates, Anthem should seize underappreciated market share and post accelerated profit growth in a post-rebate environment that champions transparency. (See the analyst's track record here.) 

“Rapid evolution of the PBM market and model greatly advantages an integrated managed care (MCO)/PBM solution, in our view, just as Anthem is bringing its PBM in-house,” Sopcak said. Anthem’s withdrawal from the Express Scripts Holding Co ESRX service is seen to set the stage for incremental scale.

Considering UnitedHealth Group Inc UNH’s precedent in integrating its PBM, as well as Anthem leadership’s involvement in UnitedHealth’s execution, Sopcak expects Anthem to record $1.1 billion in PBM-driven pretax profit in 2021. With relatively low risk, the transition is seen to yield a fresh and profitable opportunity.

“Tighter integration of pharmacy with medical benefits should both enhance Anthem's margins and opportunities to compete for new business in Medicare and Medicaid,” the analyst said. “In addition, we model heightened capital deployment, which could consist of tuck-in M&A akin to recent deals or share repurchases,as the PBM accelerates free cash generated and access to unregulated capital starting in 2020.”

Morgan Stanley raised its price target to account for Anthem’s PBM in-sourcing, underappreciated PBM growth and accelerated core growth.

Price Action

Anthem shares were trading up 1.3 percent to $267.13 off the open Wednesday. 

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