NEW YORK (AP) — Citi Investment Research analysts said Tuesday that CVS Caremark Corp. and some smaller pharmacy benefits management companies should benefit in 2012 and 2013 from the split between Walgreen Co. and leading PBM Express Scripts Inc.
Analyst Deborah Weinswig downgraded Walgreen shares to "Sell" from "Neutral," citing the business Walgreen is losing after it stopped filling prescriptions for Express Scripts on Jan. 1. Weinswig placed shares of CVS Caremark, which owns a large drugstore chain and a pharmacy benefits management business, on her list of stocks with a top recommendation.
Walgreen said in June that it would stop filling prescriptions for Express Scripts at the end of 2011, when a contract between the two companies ran out. The companies were unable to agree on how much money Express Scripts should pay Walgreen to fill prescriptions. The dispute has taken a chunk out of Walgreen's sales, but the Deerfield, Ill., company said it would prefer to lose that business rather than fill unprofitable prescriptions.
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Weinswig said Walgreen and Express Scripts probably won't start doing business together again in 2012. Meanwhile Walgreen has little leverage because many employers and health plan sponsors don't mind that its stores are no longer part of their networks. The company is trying to negotiate its own service contracts with some Express Scripts clients so it can keep their business, but Weinswig said plan sponsors are finding that Walgreen wants to charge similar or higher rates compared to pharmacy benefits managers.
CVS, Express Scripts and Medco Health Solutions Inc. are by far the largest pharmacy benefits management companies. Citi analyst George Hill said smaller PBMs like SXC Health Solutions Corp. and Catalyst Health Solutions Inc. could also get more business in 2012 and 2013. Most pharmacy benefits management contracts last for three years, and Hill said some Express Scripts clients will take their business elsewhere so their employees can continue to pick up their prescriptions at Walgreen stores.
He said employers may favor Catalyst and health plan operators may favor SXC.
Further complicating matters, Express Scripts is trying to buy Medco. The companies announced their proposed merger in July and hope to complete it in the first half of 2012.
Weinswig said CVS could get an extra 16 cents per share in profit this year by taking away prescriptions and other sales from Walgreen. She said CVS stores are taking about 30 percent of the business Walgreen has lost. Meanwhile she believes the Caremark pharmacy benefits management business should continue to win new contracts after a strong 2011.
She raised her price target on CVS stock to $51 per share from $45 and cut her price target on Walgreen shares to $28 per share from $35.
Shares of CVS rose 1 cent to $43.28 in afternoon trading, while Walgreen stock declined 58 cents to $33.70. Shares of SXC Health Solutions fell 60 cents to $60.52 and Catalyst shares gave up 48 cents to $56.38.
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