CVS Slides After Rating Cut On Remuneration Fees Exposure

Shares of CVS Health (CVS) are sliding after Baird analyst Eric Coldwell downgraded the stock to Neutral, voicing concern over the company’s exposure to Direct and Indirect Remuneration, or DIR, fees. This follows a white paper on the Pharmacy Benefit Managers, or PBMs, use of DIR fees by Frier Levitt, claiming PBMs have driven up drug costs with “murky” DIR fees that “lack any reasonable transparency” and “increase the cost of drugs to Medicare and beneficiaries.”

NEGATIVE ON CVS: In a research noted this morning, Baird’s Coldwell downgraded CVS Health to Neutral from Outperform, saying fundamentals are not good and noting that the company’s exposure to DIR fees is what concerns him most. Moreover, the analyst told investors that he would recommend selling the shares but for the strong cash flow and potential outsized benefits it might see under corporate tax reform scenarios. Coldwell pointed out that his healthcare supply chain concerns have mounted since early November, while saying that DIR fees may become the top issue in 2017 and beyond. Acknowledging that recent reports from CMS and Frier Levitt have forced his conclusion on CVS a bit sooner than desired, the analyst noted that what has become more concerning to him is how much CVS’s aggressive approach with DIRs might have been propelling the Pharmacy Benefit Management segment performance and masking Retail/LTC underperformance. Additionally, Coldwell expressed concern over how much CVS might be earning from DIRs and what the risk might be if there is intervention. Beyond DIRs, the analyst noted he is concerned over severe deleveraging on volume losses to Walgreens (WBA), incessant reimbursement pressures, waning competitive advantage, increasing competitive dynamics, a sluggish Rx market, and retail and consumer headwinds. However, these items are largely known and baked into disappointing outlooks already issued by CVS for Q4 and 2017, he contended.