On Thursday, shares of companies owning the major Pharmacy Benefit Managers (PBMs) – UnitedHealth Group (NYSE:UNH), CVS Health (NYSE:CVS), and Cigna (NYSE:NYSE:CI) – experienced a decline of 5-6% following the introduction of a new PBM reform bill. Elevance Health (NYSE:ELV), currently trading near its 52-week low of $379.29, has seen its shares decline by approximately 27% over the past six months.
According to InvestingPro analysis, the company maintains strong financial health with a "GOOD" overall rating, suggesting resilience during market uncertainty. The proposed legislation, presented on December 11 by Senators Warren (D-MA) and Hawley (R-MO), along with a companion bill in the House by Representatives Auchincloss (D-MA) and Rose (R-TN), mandates Managed Care Organizations (MCOs) and PBMs to sell off their pharmacy businesses within three years of the bill's enactment.
The bill targets a broad array of pharmacy operations including specialty pharmacies, mail order, and retail pharmacies. Analysts view the passage of the bill as uncertain, anticipating that it might be part of a larger PBM reform effort potentially tied to a drug pricing bill. The proposed reforms could also include changes such as banning retail spread pricing and retained rebates in favor of administrative fees.
The Big 3 PBMs are assessed to have pharmacy assets substantial enough to potentially operate as independent publicly traded entities, which could help maintain shareholder value. In contrast, smaller PBMs owned by companies like Elevance Health (NYSE:ELV) and Humana (NYSE:NYSE:HUM), as well as Prime Therapeutics, might opt to sell their lesser pharmacy assets to private equity or strategic buyers.
For Elevance Health specifically, InvestingPro data reveals a strong dividend track record with 14 consecutive years of increases and a current yield of 1.69%. The company's robust financial position is further evidenced by its healthy current ratio of 1.5 and manageable debt-to-equity ratio of 0.62. Discover more insights about ELV and other healthcare companies through InvestingPro's comprehensive research reports, available for over 1,400 US stocks.
The analyst from Bernstein outlined two main ways the proposed policy could compress earnings: first, by driving PBMs to seek the lowest rates from pharmacies, thereby squeezing unit costs; second, by a potential shift in PBM economics from dispensing margins back to traditional functions like rebates if the pharmacies were to be spun off. The adoption of an administrative fee model could lead to improved costs being passed on to PBM clients.
Investors are also considering the implications of this policy for other vertical integrations within healthcare services. The separation of MCOs and PBMs is seen as less likely due to the growing importance of drug cost management in overall healthcare cost control. The analyst suggests that efforts to break apart MCOs and value-based care providers would be more challenging due to the diverse nature of entities, including nonprofits like Kaiser Permanente, that own such assets.
In other recent news, UnitedHealth Group Inc (NYSE:UNH). has been facing public backlash following the death of executive Brian Thompson, which has intensified criticism towards the health insurance industry. While the motive behind Thompson's death remains unknown, the incident has sparked concerns about the potential for violence against insurance executives. In response to the incident, companies like Centene (NYSE:CNC) Corp. have moved their events online, and there are discussions about enhancing security measures in the industry.
Simultaneously, Elevance Health Inc. has successfully closed a multi-tranche debt offering, raising a total of $4.35 billion. The proceeds are intended for general corporate purposes including potential acquisitions, debt repayment, and repurchasing common stock under the company's share repurchase program.
Several analysts have adjusted their outlook on Elevance Health Inc. following its Q3 2024 earnings. JPMorgan (NYSE:JPM), TD Cowen, Jefferies, Leerink Partners, RBC Capital Markets, and Truist Securities have all lowered their price targets, while maintaining positive ratings on Elevance's stock. Despite these adjustments, the firms project an EPS growth for Elevance in 2025, expressing confidence in the company's future performance.
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