CVS' Exposure To Drug Pricing And PBM Debate Casts A Shadow On The Outlook

Citing CVS Health Corp CVS's exposure to drug pricing and the ongoing PBM debate, Baird downgraded shares of the company to Neutral. The firm doesn't think fundamentals are good either.

Healthcare Supply Chain Concerns A Top Issue In 2017

Analyst Eric Coldwell noted that his healthcare supply chain concerns had mounted since early November and would be the top issue in 2017 and beyond. The analyst sees Diplomat Pharmacy Inc DPLO's bludgeoning at the hands of CVS' direct and indirect remuneration, or DIR, fees as a Canary in a Coalmine event.

With not much evidence emerging from the recent CMS and Frier Levitt reports, Baird could not quantify CVS' risk if DIRs became more heavily regulated or ended altogether.

Fundamental Concerns Also Weigh Down

Among Baird's fundamental concerns are CVS' severe deleveraging on volume losses to Walgreens Boots Alliance Inc WBA, incessant reimbursement pressures, waning competitive advantage, increasing competitive dynamics, a sluggish Rx market, retail and consumer headwinds and a few other not-so-insignificant items.

Baird Wary Of DIR-hit

However, Baird said its Friday's action was forced mainly due to the DIRs, given CVS' aggressive approach with DIRs that might have propelled PBM segment performance, masking retail/LTC underperformance. The firm is concerned how much hit CVS' earnings will take if there is intervention in the DIRs, as a lot of parties, including the CMS, the president and Congress are called to intervene.

Rating/Price Target Lowered

Concluding, Baird said it would have recommended selling shares of CVS but for the strong cash flow and potential outsized benefits it might see under corporate tax reform scenarios. Although the firm is negative on CVS, it is currently moving to a Neutral rating from an Outperform. The price target also goes down to $77 from $86.

In pre-market trading, shares of CVS Health were slipping 1.89 percent to $76.50. At last check, CVS shares were down 4.81 percent at $74.22.