President Donald Trump announced his plan to lower U.S. prescription drug prices on Friday, triggering a major rally in drug retail stocks such as CVS Health Corp (NYSE: CVS). With much of the risk associated with drug pricing initiatives already priced into beaten-down stocks like CVS, analysts say now is the time for long-term investors to step in and buy.
Trump’s new plan, which he is calling “American Patients First,” is focuses on creating incentives for lower drug pricing, improving the price negotiation process and increasing competition in the space.
[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]
“Everyone involved in the broken system — the drugmakers, insurance companies, distributors, pharmacy-benefit managers and many others — contribute to the problem,” Trump said in his speech.
However, many drug stocks rallied after Trump’s speech provided few details and his plan seemed to the teeth that some investors had feared. For example, Trump’s plan does not include provisions to allow Medicare to negotiate drug prices directly with manufacturers.
Jefferies analyst Jared Holtz told CNBC there seemed to be little for drug investors to fear from Trump’s proposal.
“This was a 10- to 15-minute speech where no real details were brought forward,” Holtz says.
CVS stock sold off last week after FDA commissioner Scott Gottlieb said the government may consider using anti-kickback regulations to crack down on drug rebates. Trump made no mention of such a plan.
Bank of America analyst Michael Cherny says fears surrounding a drug pricing crackdown are already priced into drug stocks such as CVS, but the actual plan is not a worst-case scenario for drug companies.
“We fully recognize that in general there remains ongoing pressure on drug pricing broadly and thematically the various companies in the space will continue to have to find ways to augment their offerings and go-to-market strategies in order to drive maximum value to the market,” Cherny says.
Cherny says once CVS completes its pending $69 billion buyout of Aetna ( AET), CVS stock will be trading at just about nine times its projected fiscal 2019 earnings per share.
[See: 7 Big Pharma Stocks to Buy for Big Dividends.]
“CVS remains the stock with our best total risk/reward given the opportunity the company has to evolve its business through the acquisition of Aetna,” Cherny says.
Bank of America has a “buy” rating and $88 price target for CVS stock.
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Why CVS Health Corp Stock Rallied on Trump’s Drug Plan originally appeared on usnews.com
