Shares of Walgreens Boots Alliance (WBA) dropped in morning trading after an analyst downgraded the stock, saying he believes the company’s guidance will fall short of consensus estimates. Separately, another analyst noted a threat to retail players like Walgreens from Amazon’s (AMZN) potential entry into the drug distribution value chain.
DOWNGRADE TO EQUAL WEIGHT: Ricky Goldwasser, an analyst at Morgan Stanley, cut his rating on Walgreens Boots Alliance to Equal Weight from Overweight, saying he believes the company’s guidance will be below analysts’ consensus estimates when it reports earnings on October 25 as its growth slows. Goldwasser, who also reduced his price target on shares to $85 from $95, told clients that the key driver of his lower estimates are the recent Medicare Part D preferred network exclusions, but also cited reimbursement cuts in the U.K. as well as reimbursement pressure in the U.S. He believes Walgreens will face a headwind to earnings per share of 11c-14c after being excluded from CVS Health’s (CVS) Silverscript, Envision (EVHC), and Aetna’s (AET) Medicare preferred networks, which could shift 4 million to 5 million scripts out of Walgreens’ stores. In June, Walgreens reported quarterly earnings that beat analysts’ estimates and raised the lower end of its fiscal 2017 EPS guidance to $4.98-$5.08, in line with analysts’ estimates at the time of $5.00.
CVS A BENEFICIARY: Separately, Goldwasser said CVS is viewed as beneficiary of preferred network dynamics next year, but he maintained his Equal Weight rating on the stock as he is below consensus for 2018 “as we see pricing dynamics offsetting some of the volume benefits.”
AMAZON THREAT: Amazon is said to be looking at entering the retail pharmacy industry, which may impact Pharmacy Benefit Managers, or PBMs. In a note to clients this morning, Leerink analyst Ana Gupte said she believes that Amazon “will almost certainly” enter the drug distribution value chain within two years, evolving into a more “disruptive” offering over time. She said Amazon’s potential move is most threatening for retail players like Walgreens, as well as CVS and Wal-Mart (WMT), and provides both an opportunity and a threat for Express Scripts (ESRX). Gupte noted OptumRx (UNH) and Humana (HUM) would be “largely buffered” from the move. According to her conversations with specialists, Amazon is hiring relevant talent and is in active discussions with mid-market pharmacy benefit managers and possibly even with large players such as Prime Therapeutics. Additionally, she said she expects Aetna, Anthem (ANTM) and Cigna (CI) will likely contemplate Amazon’s entry in their upcoming PBM contract decisions.
