On Monday, Goldman Sachs (NYSE:GS) adjusted its stance on shares of Option Care Health (NASDAQ: NASDAQ:OPCH), downgrading the stock from Buy to Neutral and setting a price target of $27.00. The decision followed the company's third-quarter earnings call, where management revealed negotiations with Stelara's manufacturer that will lead to a significant reduction in the drug's spread in 2025.
The downgrade reflects concerns over the potential for similar pressures to affect other drugs in Option Care Health's portfolio. Goldman Sachs had previously believed that Option Care's offerings, including Stelara, were relatively shielded from gross profit pressures as drugs became generic.
However, the expected rapid decline in Stelara pricing and the precedent it sets for spread compression poses heightened risks, particularly with several loss of exclusivity (LOE) events anticipated between 2025-2029.
In addition to the Stelara issue, Goldman Sachs' analysis indicates a slower introduction of new infused chronic therapies over the next four years, with a focus on Oncology, a field where Option Care Health has limited exposure. This expected shift in the pharmaceutical pipeline could further impact the company's profitability.
The firm's revised adjusted EBITDA forecasts take into account the upcoming profit headwinds from Stelara, the potential for other major drugs to face LOE events, and the overall pharma infusion pipeline. Goldman Sachs' report details the expected challenges stemming from Stelara, the LOE events, and the assumption changes in their model through 2027.
In other recent news, Option Care Health has experienced significant developments. The company's third quarter earnings report showed a robust 17% increase in revenue due to organic growth initiatives, and an adjusted EBITDA of $115.6 million.
Despite supply chain disruptions, the company ended the quarter with a solid $483 million in cash. Looking ahead, the company expects 2024 revenue to fall between $4.9 billion and $4.95 billion.
However, Truist Securities, Deutsche Bank (ETR:DBKGn), Jefferies, and BofA Securities have all revised their outlooks on the company. Truist Securities lowered its price target to $34, despite maintaining a Buy rating. Deutsche Bank reduced its price target from $36 to $30, while Jefferies and BofA Securities downgraded the company's stock, citing concerns about the pricing of the drug Stelara.
Option Care Health is also considering strategies for capital deployment, including share repurchases and potential mergers and acquisitions. However, the company faces challenges such as IV bag shortages and changes in drug pricing due to the Inflation Reduction Act, which are expected to impact financial results in 2025. These are recent developments that investors should consider when evaluating Option Care Health's performance and prospects.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Option Care Health's current situation. The company's market capitalization stands at $4.1 billion, with a P/E ratio of 19.37. Despite the challenges highlighted in Goldman Sachs' downgrade, Option Care Health has shown a revenue growth of 13.58% over the last twelve months, with quarterly revenue growth of 16.97% in Q3 2024.
InvestingPro Tips indicate that management has been aggressively buying back shares, which could be seen as a sign of confidence in the company's long-term prospects. However, the stock has taken a significant hit recently, trading near its 52-week low with a 20.03% decline in the past week alone. This aligns with Goldman Sachs' concerns about future profitability pressures.
Interestingly, despite the downgrade, InvestingPro data shows that analysts still predict the company will be profitable this year, with a fair value estimate of $31.50 per share. This suggests there may be potential upside from the current price levels, although investors should weigh this against the risks outlined in the Goldman Sachs report.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for Option Care Health, providing a deeper understanding of the company's financial health and market position.
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