Express Scripts shares languish as Anthem dispute weighs

By Lewis Krauskopf

NEW YORK (Reuters) – As a pharmacy benefits manager geared toward holding down prescription costs, Express Scripts would appear to be in a sweet spot with rising political and public pressure on drug prices, but its stock has struggled this year.

The main culprit: a contract dispute with a major customer, Anthem Inc , that burst into the open at the start of the year, putting at risk business representing an estimated 16 percent of Express Scripts’ 2015 revenue.

Shares of Express Scripts have fallen 13.5 percent in 2016 against a 3 percent decline for the broader S&P 500 healthcare index <.SPXHC>.

As the lone major publicly-traded independent pharmacy benefit manager, Express Scripts also faces competitors that might be able to offer different advantages as parts of larger businesses.

At Friday’s price of $75 each, shares are only 11.5 times the company’s earnings estimates over the next 12 months, below their five-year average of 13.7 times, according to Thomson Reuters data.

Anthem sued Express in March, seeking $13 billion in price cuts over the remaining four years of its contract. Express has accused Anthem of negotiating in bad faith, but also said it aims to keep the insurer as a customer.

“This situation with Anthem is not something we can quantify, said Les Funtleyder, healthcare portfolio manager at E Squared Asset Management in New York. “If we can’t quantify it we’d rather not be invested in it.”

The dispute comes as another pharmacy benefit manager, UnitedHealth Group’s OptumRx, has scored contract wins, signaling heightened competition.

“I think the loss of Anthem is priced in,” said Jeff Jonas, portfolio manager with Gabelli Funds in Rye, New York. “What’s a little uncertain still is do other contracts leave as well?”

Of its top rivals, CVS Caremark also operates a massive retail pharmacy chain, while OptumRx parent UnitedHealth is one of the biggest U.S. health insurers. CVS trades at 15.2 times forward earnings, UnitedHealth at 16.4 times.

“The issue we’re trying to get our arms around right now is what model works best,” said David Heupel, healthcare analyst with Thrivent Financial in Minneapolis, which owned 720,000 Express Scripts shares as of March 31, according to Thomson Reuters data. “Do you need to be independent or do you need to be part of something else?”

If the company, under Chief Executive Tim Wentworth, who took over in May, were to look at acquisitions that expand its services, such as managing home-infusion medicines, Jonas said that could make the shares more appealing.

Morningstar analyst Vishnu Lekraj, who has put the stock’s fair value at $100, believes Anthem is most likely to stick with Express Scripts, and that the shares stand to gain as investor fears wane.

The pharmacy benefit management group “is going to be a space that benefits from what’s happening in the healthcare industry,” Lekraj said. “Companies that provide efficiencies and cost savings services are going to be the companies that benefit longer term.”

(Reporting by Lewis Krauskopf; Editing by Linda Stern and Andrew Hay)