CVS, Cigna could be hit hard by PBM reform: Deutsche Bank

Deutsche Bank sees CVS Health (NYSE:CVS), Cigna (NYSE:CI) and Humana (NYSE:HUM) all being significantly impacted if Congress passes legislation requiring health insurers and pharmacy benefit managers, or PBMs, to divest their pharmacy businesses.

In a recent note, the bank said it would expect CVS (NYSE:CVS) to be the most impacted as it would likely be forced to separate its Caremark PBM from its retail pharmacy and Caremark mail and specialty businesses. It estimated that CVS (CVS) could lose more than 50% of its consolidated operating earnings if such a split were to occur.

A divestiture of Cigna’s (NYSE:CI) mail and specialty units could have a similar impact, with Deutsche Bank estimating the businesses contribute around 40% of the company’s total operating earnings.

The bank noted that while Humana (NYSE:HUM) has a large PBM business, “most of this business is underwritten through its Medicare segment.”

As for UnitedHealth Group (NYSE:UNH), Deutsche Bank sees a potential divestiture as not having a significant impact on earnings, estimating the risk at likely less than $200M of the company’s roughly $30B+ operating earnings.

Deutsche Bank noted, however, that CVS (CVS), Cigna (CI) and UnitedHealth (NYSE:UNH) “could face additional risk from losing the ability to vertically integrate the PBM, fulfillment and manufacturing functions of biosimilars through organizations like Cordavis and Quallent.”

Despite concerns about the potential breakup of their pharmacy businesses, Deutsche Bank maintained buy ratings on UnitedHealth (UNH), CVS (CVS) and Cigna (CI), along with a hold rating on Humana (HUM).