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Trump Drops Drug Rebate Proposal: What's Next and What Stocks to Play

Christopher Vargas

The Trump administration announced Thursday that it’s deciding to withdraw its proposal to eliminate rebates from government drug plans. The proposed rule was a key component of the administration’s effort to lower prescription drug prices. The rule was designed to bring down the prices of drugs by hindering the profits of prescription benefit managers. Prescription benefit managers would negotiate rebates to lower the cost of drugs from pharmaceutical companies to insurers. The PBMs would then use their market power to bargain with the pharmaceutical companies to bring the price down and pocket a share of those rebates as profit. The recently withdrawn proposal would have passed a fee onto PBMs for including drugs on their plan and passed down the discounts to consumers at the pharmacy counter.

People have long scrutinized PBMs for keeping some of the rebates for themselves as profit and pharmaceutical companies have too pointed their finger at PBMs for raising the prices of drugs. In response to the administration’s withdrawal, the biggest PBM operators closed in the green, with CVS Health CVS up over 4%, Cigna CI gaining over 9%, and UnitedHealth UNH closed with a gain of 5.53%. Cigna’s acquisition of Express Scripts, which is the largest PBM, gives the company heavy exposure to the sector.

Aftermath Outlook

Despite the setback, the Trump administration is still determined to continue their campaign to lower drug prices for Americans. The blame of skyrocketing drug prices will now shift over to the pharmaceutical companies after the failed attempt to hold PBMs accountable. In response to the news of the retraction of the rebate proposal, pharmaceutical companies closed with losses; Merck & Company MRK fell more than 4% and Gilead Sciences GILD was down almost 2%.

The proposal struggled to gain support as it was estimated that it would cost the federal government $177 billion through 2029 to implement the project. The administration announced on Friday that it plans an executive order called a “favorable nations clause” which would have U.S. patients pay no more for a drug than the country with the lowest prescription price. If passed, this executive order would pass on the price decreases on pharmaceutical companies, which would not bode well with them.

4 Stocks That Can Capitalize

Humana HUM is a stock that is currently listed at a Zacks Rank #3 (Hold) and has exposure to the PBM sector. The stock has been able to surge 13.1% over the last four weeks and closed over 4%. Humana has been able to consecutively surpass our Consensus Estimates the past four quarters for an average EPS surprise of 5.05%. Consensus Estimates are calling for a 32.32% surge in earnings to go along with a 11.52% increase in revenue for the current quarter. Double digit growth in both revenue and earnings through the current year cement this stock as a solid pick for investors looking to capitalize on the dropped proposal.

Centene Corporation CNC is an additional company that is a PBM player and is a Zacks Rank #3 (Hold). Centene was able to exceed our previous quarter estimate of $1.32 by posting earnings of $1.39 for an EPS surprise of 5.30%. The stock closed up 3.93%, and its earnings and revenue growth is looking solid. Consensus Estimates are predicting a 38.39% earnings increase with a sales spike of 26.84% for the current quarter. Looking ahead to the stock’s full current year outlook, estimates are projecting a bottom-line rally of 23.73% on the back of a 22.01% top line increase. CNC is a sound stock to pick for investors looking to strike the iron while its hot.

Anthem ANTM, like the previous two stocks is a company that is involved with PBM’s. The medical stock has rallied a solid 20.2% over the past 12 weeks, and is currently sitting at a Zacks Rank #2 (Buy). Year-over-year growth estimates are forecasting a 29.66% improvement to the company’s bottom line and 10.52% increase to its top line for the next quarter. In addition, the stock is coming off a good quarter, beating our estimates by $0.17 for an EPS surprise of 2.90%. Anthem has really had a solid last couple of months and potential investors may be tempted into diving into the stock while PBM players are in the clear.

AmerisourceBergen ABC is a company that has not disappointed shareholders this year and is currently a Zacks Rank #2 (Buy). The stock is up 21.7% year-to-date and is looking to ride this return wave into the second half of 2019. Consensus Estimates are calling for the stock to see an earnings increase of 5.55% on the back of a revenue jump of 6.53% for the current year. In addition to the company’s positive full year outlook, the stock is currently being traded at a discount relative to its industry at 13X its forward earnings while the broader industry is averaging 23.05X. The stock’s earning yield of 7.67% surpasses the industry average, further cementing the stock as a strong consideration for investors looking to play the field.

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Merck & Co., Inc. (MRK) : Free Stock Analysis Report
Cigna Corporation (CI) : Free Stock Analysis Report
Gilead Sciences, Inc. (GILD) : Free Stock Analysis Report
Centene Corporation (CNC) : Free Stock Analysis Report
Humana Inc. (HUM) : Free Stock Analysis Report
UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
Anthem, Inc. (ANTM) : Free Stock Analysis Report
CVS Health Corporation (CVS) : Free Stock Analysis Report
AmerisourceBergen Corporation (ABC) : Free Stock Analysis Report
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