(Medco, Express Scripts story, updated for Wednesday market close)
NEW YORK (
) -- Forward-looking guidance is often more important to investors than the printed earnings number, and that was the case on Thursday for the small group of health care stocks in the pharmacy benefits manager (PBM) sector.
Medco Health Solutions
provided no visibility on the 2011 sales environment in its earnings, a surprise for investors. The PBM stocks, including
SXC Health Solutions
( SXCI) and
Catalyst Health Solutions
( CHSI) slipped in trading on Thursday as a result of the Medco commentary.
Health care investors knew that the generic pipeline was weak for 2011, but the lack of any visibility from Medco -- which said it would wait until the third quarter earnings to provide an update on the 2011 sales environment -- seemed to spook investors in the PBM stocks, and lead to some profit-taking.
Medco slumped by as much as 10% early on Thursday, before its losses were pared back to a 8% at the close on Thursday afternoon. Express Scripts ended down 6.8% as a derivative trade on the Medco news. Both PBM stocks were trading at four times their average daily share volume, with more than 20 million shares traded on Thursday in shares of each prescription benefit manager.
SXC Health Solutions and Catalyst Health Solutions, the small cap players in the space, were both down on Thursday afternoon by roughly 3% on elevated trading volume. There were more than one million shares of SXC Health Solutions traded on Thursday. The PBM stock has only experienced three days previous to Thursday of more than one million shares traded in 2010, and in each case, the trading was bullish.
The frank comments from Medco management about the 2011 outlook makes the upcoming Express Scripts earnings -- on July 28, after the market close -- that much more important as a read-through of the sales environment for these stocks, though it most likely will provide a similar outlook as Medco did on Thursday.
Analysts are expecting 59 cents in earnings from Express Scripts in next week's report, on revenue of $11.4 billion. The Express Scripts estimate hasn't changed in the past three months. In the June 2009 quarter, Express Scripts beat the Street by a penny, with earnings of 44 cents.
Medco beat in its earnings, reporting 83 cents per share versus a Street consensus of 79 cents. Yet the lack of visibility on 2011, and lower profit margin expectations for prescription sales for the rest of the year, led to the downward pressure on Medco shares.
David Shove, an analyst at BMO Capital Markets, said that on a fundamental basis the PBM stocks are fine, and 2012 will be a strong generic pipeline year after a weak 2011. The stocks have earnings levers aside from the generic drug sales also. However, investors aren't betting on a two-year time horizon, and the generic sales trends tend to outweigh the efforts by the PBM companies to diversify earnings streams.
Additionally, the BMO analyst said that Medco had been fairly bullish in recent road show activity, and so, its more blunt comments during the earnings conference call about the lack of visibility took some by surprise.
"Any time you have this sort of doubt, the feeling spreads through the investor universe that you better get out before everyone else does," Shove said. He explained that while most investors expect a weak generic pipeline in 2011, the Medco earnings commentary served as validation for that outlook. "When the boss says it out loud, it takes on new meaning," the BMO analyst said, adding "I wasn't surprised by lack of visibility, but the violence of selloff early on Thursday."
Selling action was also heavy on Thursday in the pharmaceutical supply chain, with the biggest loss related to the Medco earnings suffered by
AmerisourceBergen shares lost just less than Medco on Thursday, down 7.4%, and its trading volume of 17 million shares was well above its average daily volume of 3.7 million shares traded.
experienced trading volume of 9.4 million shares on Thursday, well above its typical day in trading of a little more than 2 million share volume. McKesson was down just short of 3%, or $1.90, on Thursday.
finished Thursday losing more than 4%, on more than twice its average daily volume of 4 million shares traded.
AmerisourceBergen is the next on deck to report earnings from this group, on July 27. McKesson will report on July 30, and Cardinal Health not until August 5.
The macroeconomic environment has really hurt the health care sector broadly in this earnings season, with fears of the deflationary pressures and the lingering joblessness in the U.S. serving as negative pressures for the stocks, including the PBM players. It's led to questions about the multiples at which the PBM stocks have been trading, and the Medco lack of 2011 visibility has raised the prominence of the multiple question. The PBM space has already taken a hit this year in terms of multiple compression, but the Medco earnings commentary will trigger a new round of Street debate about whether further multiple compression is necessary.
PBM stocks are typically seen as safe havens, or "hiding places" within health care sector, but BMO's Shove said after the Thursday selling in Medco, Express Scripts et al, that "the last hiding place has been found out."
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-- Written by Eric Rosenbaum from New York.
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