Big pharmacy benefit managers (PBMs), Uncle Sam wants you. And not in a good way.
The Federal Trade Commission (FTC) announced on Sept. 20 that it filed a lawsuit against the three biggest PBMs in the country: CVS Health's (NYSE: CVS) Caremark Rx, Cigna Group's (NYSE: CI) Express Scripts, and UnitedHealth Group's (NYSE: UNH) OptumRx. These three PBMs together account for roughly 80% of the prescriptions administered in the U.S.
Unsurprisingly, CVS Health, Cigna, and UnitedHealth Group stocks fell last week after the FTC lawsuit announcement. But are these PBM stocks bad news buys?
Going after the big PBMs
The FTC alleges that the big three PBMs "have abused their economic power by rigging pharmaceutical supply chain competition in their favor, forcing patients to pay more for life-saving medication." In particular, the agency argued that the rebate practices of Caremark, Express Scripts, and OptumRx caused the list prices of insulin drugs to be artificially high and limited patients' access to insulin products with lower list prices.
PBMs operate as middlemen between drugmakers and pharmacies. Clients, including employers, health insurers, and labor unions, contract with PBMs to help lower their health plans' prescription drug costs.
One of the ways PBMs make money is by negotiating with drugmakers to receive rebates and fees tied to the list prices of drugs. The higher the list price, the greater the rebates and fees the PBMs receive.
The FTC believes that Caremark, Express Scripts, and OptumRx threatened to exclude insulin drugs from their formularies (lists of prescription drugs that are reimbursed by health plans) to obtain higher rebates from drugmakers. The drugmakers then increased the list prices of their drugs to inflate the rebates and fees for the PBMs, according to the FTC's lawsuit. When lower-cost insulin products became available, the FTC alleges that the big three PBMs left them out of their formularies but kept identical products with higher list prices in the formularies.
More to the story
The big PBMs vehemently disagree with the FTC's allegations. CVS Caremark said in a statement that it's drugmakers who are increasing the prices of drugs rather than PBMs. Cigna Chief Legal Officer Andrea Nelson said in a statement that the FTC's lawsuit is a continuation of a "troubling pattern" of "unsubstantiated and ideologically driven attacks" on PBMs.
Nelson stated that she thinks it's "an unlikely event" that the FTC will succeed with its lawsuit. What would the impact on CVS Health, Cigna, and UnitedHealth Group be if she's wrong?
Although PBMs aren't the only moneymaker for CVS Health, Cigna, and UnitedHealth Group, they're important sources of revenue. In the second quarter of 2024, CVS' health services segment, which includes its PBM unit, generated roughly 46% of its total revenue. Cigna's PBM contributed nearly 82% of its total Q2 revenue. OptumRx made up almost 33% of UnitedHealth Group's total revenue in the second quarter.
Perhaps these big PBMs would try to pass along any negative financial impact that might result from an FTC win to their clients. However, it's also possible that clients could choose to leave the middlemen out of the picture altogether if the value they provide decreases.
Are these PBM stocks good picks to buy on the dip?
CVS Health faces a myriad of challenges right now -- and not just with its PBM business. The head of the company's Aetna insurance business is gone with CEO Karen Lynch and CFO Tom Cowhey taking over the day-to-day management. I view CVS Health as a potential turnaround play. However, I still think most investors are better off staying on the sidelines until more progress is made.
Cigna is performing well across the board. The stock is valued attractively, in my opinion, with a price-to-earnings-to-growth (PEG) ratio of 0.81. Because Cigna depends more heavily on PBM revenue, any issues with this part of its business could be concerning. The stock looks like a good choice to buy on the dip, though.
Of the three, I like UnitedHealth Group the most. The company's financials are exceptionally strong. It's moving past the fallout from the cyberattack on Change Healthcare. UnitedHealth Group is also more diversified across multiple lines of business than CVS Health and Cigna are. The stock has delivered a total return of roughly 7.6x over the last 10 years. I expect that UnitedHealth Group will keep up its winning ways.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
