Leerink Decreases CVS Price Target After Drug Pricing Pressure - TheStreet

Healthcare investment bank Leerink Partners downgraded its price target for CVS Health (CVS) - Get Report   thanks to pricing pressure in the drug industry.

"We are reducing our revenue forecasts due mainly to moderated pricing assumptions," analyst David Larsen of Leerink wrote in a note.

Leerink will downgrade its price target from $110 per share to $105 per share. The investment firm still has a buy rating on the stock.

"The retail pharmacy and [pharmacy benefit manager] markets are highly competitive," Larsen wrote, noting that consolidation within the PBM and pharmacy space poses a risk to CVS's valuation.

Analyst Vishnu Lekraj of Morningstar has a similar view of the company. Lekraj said by phone that Morningstar has an undervalued rating on CVS, with a price target of $104 per share.

He pointed to the media's recent focus on drug pricing, which was spurred by Mylan NV's (MYL) price increases of its EpiPen drug, which amounted to 25% each year, as something that could play to CVS's strengths, especially for its pharmacy benefit manager division.

"The laser focus of controlling pricing, especially drug pricing, plays to the strength of PBMs," Lekraj said by phone. "Controlling drug pricing falls squarely in what they do."

Larsen disagreed. He noted that when drug companies lower prices, PBMs make less money. "PBMs make more money on both brands and generics when prices rise," Larsen wrote.

Regardless, investors seem wary of the industry, which accounts for Leerink's price target drop.

Though the firm has lowered its price target, Larsen still said the company is worth an investment. "We believe CVS stands to benefit from the ongoing branded drug patent cliff and the high growth rate of specialty pharmaceuticals," Larsen wrote.

"As both a retail pharmacy and PBM, we believe CVS has a differentiated offering and substantial buying power which allows the company to price highly competitively while delivering high quality care and unique cost-saving models that many plan sponsors are seeking," he added.

Lekraj seconded that notion. "It's a good quality play in the healthcare space," Lekraj said.

He noted that it was CVS's decision to acquire Caremark approximately six years ago, which made it not only a retail pharmacy company, but also a pharmacy benefit manager, was smart.

"It's moved away from pure play retail pharmacy into other aspects of healthcare services, particularly into the PBM space," Lekraj said. "To me that was a great move. Moving forward, the healthcare space is going to have two major pillars controlling costs and encouraging efficiency in the system."

In Larsen's opinion, CVS deserves to see an uptick in the markets sometime soon. "We believe CVS deserves to trade at a premium to its historical multiple given sustainable market share gains at retail, and CVS is also winning share in the PBM market, with $15.2B of gross new wins in the 2015 PBM selling season which was well ahead of our expectations, and reflects strength in the core business model," Larsen wrote.

Whether or not that uptick will take place, though, is uncertain.

CVS, which has a market cap of $95.28 billion, was trading at $89.35 per share Friday, down less than a half of a percent from market's open.