Signs abound that the Trump administration plans to take tough action against pharmacy benefit managers, or PBMs, including CVS Health Corp (NYSE:CVS) and Express Scripts Holding Company (NASDAQ:ESRX), in order to lower the price of prescription drugs. Consequently, investors should sell CVS stock and Express Scripts stock.
The clearest sign of the impending fate of the PBMs is that President Trump himself said that the administration was “very much eliminating” the prescription drug “middlemen.” Trump added that “The middlemen became very, very rich. They won’t be so rich anymore.” PBMs, which buy drugs from drug makers and sell them to pharmacies, are often known as middlemen.
There are other signs that the Trump administration plans to hit the PBMs hard. Specifically, the drug price reduction plan released by the White House states that the Department of Health and Human Services, or HHS, will consider “requiring (PBMs) to act in the best interest of patients.”
The blueprint notes that the president has already proposed “requiring (Medicare Part D) plans to share a minimum portion of drug rebates with patients.”
By requiring PBMs “to act in the best interests of patients,” the administration would end PBMs’ frequent practice of choosing to include drugs that are more expensive but not more effective than competing products in their drug plans. And by taking that step, the administration would significantly cut the profits of PBMs, which usually receive a certain percentage of the cost of drugs.
Similarly, PBMs primarily make money by keeping for themselves a portion of the rebates they negotiate with drug makers. Requiring Medicare to share part of those rebates with patients would most likely cut into the revenue and profits of PBMs, causing PBM stocks to drop.
Moreover, senior Trump administration officials have harshly criticized PBMs. The FDA commissioner, Dr. Scott Gottlieb, accused PBMs of teaming up with insurers and pharmacies to block biosimilars, which are similar but usually cheaper versions of medicine that are derived from living organisms.
Dr. Gottlieb also called the revenue that PBMs receive from drug companies “kickbacks” that incentivize the PBMs to provide more expensive drugs to pharmacies and patients.
Health and Human Services Secretary Alex Azar has also taken very tough shots against the PBMs, although his statements on them have been more mixed than those of Dr. Gottlieb.
Recently, Azar said he would force PBMs to abandon their current business model in which they effectively obtain a percentage of the cost of drugs. Azar said he would prevent the PBMs from making any money at all from drug companies and look to force them to get all their money from insurers and employers.
It seems highly likely that forcing the PBMs to stop linking their revenue to very expensive drugs would significantly dent their top and bottom lines, causing PBMs stocks to drop sharply in the process.
On a positive note for PBMs and PBM stocks, Azar did previously say that he wanted them to be able to negotiate drug prices on behalf of Medicare.
Bottom Line on PBM Stocks
Still, taken together, all of the negative comments about PBMs by Trump, Gottlieb and Azar show that the administration plans to take action against the PBMs that will greatly harm their business models and hurt PBM stocks.
Although the forward price-to-earnings ratios of CVS stock and Express Scripts stock are both below 10, the stocks are still too expensive considering that their main business models look poised to get decimated. Consequently, investors should sell both CVS stock and Express Scripts stock immediately.
As of this writing, Larry Ramer did not own any of the stocks named.
