Morgan Stanley Sees Drug Pricing Still An Overhang For Diplomat, AmerisourceBergen

• Shares of Diplomat Pharmacy, Inc. DPLO have declined 33.44 in the last three months, while those of AmerisourceBergen Corp. ABC are down 12.27 percent.
• Morgan Stanley’s Ricky R Goldwasser has downgraded Diplomat Pharmacy from Overweight to Equal-weight, while downgrading AmerisouceBergen from Equal-weight to Underweight.
• Despite the recent underperformance and the strong fundamentals of the two companies, Goldwasser expects drug pricing to continue to be an overhang on both stocks.

Analyst Ricky Goldwasser mentioned that the data from the last three Presidential elections suggest that while healthcare spend and drug pricing were core issues, supply chain stock witnessed higher multiple contraction as compared to the S&P.

“While in past periods underperformance was limited to a relatively short period of time preceding the elections, and multiples recovered shortly after, with the debates starting earlier this time around, multiples could be capped for the remainder of the year and into 2016,” the Morgan Stanley report stated.

Diplomat Pharmacy

Goldwasser has downgraded the company from Overweight to Equal-weight, while lowering the price target from $58 to $31, while reporting that the company’s long-term growth outlook and fundamentals remain strong.

Goldwasser believes that as a market leader in the specialist pharmacy segment, Diplomat Pharmacy is well positioned to “to benefit from an expanding specialty market opportunity and share gains.”

The company is estimated to grow its topline by more than 30 percent, driven by its exposure to innovation in pharmaceuticals, “a shift towards limited distribution networks, and value-added services to Pharma manufacturers.”

However, Goldwasser also believes that “market uncertainty with regard to magnitude and timing of branded price inflation is likely to keep shares range-bound in the near term through the 2016 election period.”

AmerisourceBergen

The rating on AmerisourceBergen was downgraded from Equal-weigh to Underweight, with the price target being lowered from $120 to $93 “in the wake of political uncertainty.”

Goldwasser believes that although “ABC is the most levered of the distributors to branded price inflation,” U.S. distributors are likely to face decreased branded price inflation related headwinds.

The company is more at risk that its peers to such headwinds “due to a lesser degree of diversity of profit streams and highest exposure to specialty,” Goldwasser explained.

Although AmerisourceBergen is expected to continue to execute on its core business, distributor multiples tend to contract during election cycles and “and ABC has the highest multiple of the group,” the Morgan Stanley report added.