Tuesday, October 17, 2006

Calls of Note Part 3

- Citigroup notes PBMs are off about 20% from their highs on two risks could temper 1st-time '07 EPS guidance below consensus & cut long-term growth prospects.

MAIN RISK: Heightened price competition at retail drugstores led by WMT healthcare
initiative could cut PBM mailorder sales and retail PBM profits if retail drug prices fall below copay (so PBM card not used).

Citigroup Investment Research's Drugstore analyst sees low risk of WAG, CVS entering WMT
price war.

SECONDARY: PBMs revenue may be cut without commensurate expense cut if a pricing benchmark "AWP" is cut as part of a legal settlement.

Firm's analysis of the language of the settlement suggests mid-late '07 implementation; however CVS sees 1Q-2Q07 implementation. MHS says their contracts protect them from AWP change; ESRX, CMX haven't committed impact to Street. AWP goes away 2 yrs, so any PBM hit temporary.

Also a giant wave of new generics will come on the market in the coming next 12 months including a benefit PBMs will continue to reap by selling inventory of Plavix that was launched at-risk and may still be sold retail even with the injunction. In that regard, the low- priced generics getting even less expensive is the "undertow" of lost opportunity for PBMs that is more than offset by the "wave" of new drugs that are hitting the market.

Citi recommends the purchase of PBM stocks Caremark (CMX), Express Scripts (ESRX), and Medco Health Solutions (MHS).

Notablecalls: This is NOT a trading call, but I suspect it will work like one. Charts of ESRX and CMX look way extended and I happen to know that some traders I consider to be very smart money have already taken positions in these stocks.

No comments: