Oppenheimer analysts downgraded healthcare stock CVS (CVS - Get Report) from outperform to perform on Monday, citing drug pricing headwinds and the company's unfavorable exposure to the managed-care business.
CVS shares were unaffected on Monday morning, however, rising 2% to $53.85. They are down almost 18% this year, however, compared to a gain of about 16% for the S&P 500.
Oppenheimer removed its $85 price target for CVS, which was 64% above the stock's closing price on Friday.
"We are looking to reset the bar on our CVS rating, as we view it as more of a long-term opportunity given the potential timeline to execute on its strategy and the near-term legacy business challenges," the analysts wrote.
Oppenheimer said that the near-term challenge is that "we expect the drug-price noise out of Washington to continue for the foreseeable future. Shares of rival pharmacy firm Walgreens (WBA - Get Report) have plummeted 15.8% since April 1, as the company posted disappointing guidance largely due to near-term drug pricing deterioration.
Meanwhile, United Health (UNH - Get Report) shares fell 8.6% last week as Democratic presidential candidate Bernie Sanders announced a "medicare-for-all plan" that would create a single-payer health care system to replace the current employer-based system.
Oppenheimer analysts added that "we remain bullish on the overall managed care sector --particularly in light of the recent weakness in the group -- but CVS's exposure to the business is still quite modest, and we would prefer other names in the space right now," Oppenheimer said.
While CVS acquired Aetna for $71 billion in a deal that closed in late 2018, Oppenheimer notes that earnings from managed care operations will only account for roughly 31%, in the firm's own estimate, of CVS' total 2019 earnings. According to Oppenheimer, that suggests "CVS's fate will likely continue to ride on the pharmacy segments (69% combined), which we believe face less bullish prospects."
The analysts said the full integration of Aetna will take long enough that there is currently insufficient visibility to justify a higher valuation.
Oppenheimer is looking for full-year adjusted 2019 earnings per share of $6.75, a reduction from 2018's EPS result of $7.08.