New Challenge for Medco

These days, pharmacy benefit managers can't seem to catch a break.

First, Wal-Mart (WMT Quote) starts selling generic drugs so cheaply that some people have started questioning whether other drug sellers, including PBMs, should be charging less for generics as well.

Then, a firm which publishes the "average wholesale prices" of brand-name drugs accepts new policies that could lower prices on branded drugs to boot.

Some Wall Street experts have cooled on PBM stocks as a result.

UBS analyst Ricky Goldwasser this week downgraded the big three PBMs -- Medco (MHS Quote), Caremark (CMX Quote) and Express Scripts (ESRX Quote) -- over concerns about lost profits from brand-name drugs in particular.

"While PBMs should still benefit from generics opportunity, we think AWP changes will offset upside," Goldwasser warned on Monday. "In our opinion, the risk/reward landscape has changed, and we see risk for additional downside potential."

Goldwasser now has neutral ratings on all three of the major PBM stocks. Her firm has an investment banking relationship with Caremark.

Shares of all three PBMs -- already battered by Wal-Mart's plans -- fell on Monday's downgrade.

Medco slipped 2.4% to $55.75. Caremark dropped 4.1% to $51.19. And Express Scripts spiraled 6.7% to $68.96.

Faulty Data

First DataBank, a division of Hearst that serves drug middlemen like PBMs, has been forced to change its ways.

PBMs rely on firms like First DataBank -- which portrays itself as the largest outfit of its kind -- to publish AWP rates for brand-name drugs.

PBMs charge their clients discounted AWP rates, pay manufacturers even lower rates for the drugs and then pocket the so-called spreads in between.

But those spreads could soon narrow.