Pharma bonds move wider on proposed regulation

2 min read
Americas
William Hoffman

Pharmacy benefit managers (PBMs), which administer employer and government-sponsored prescription drug plans, are facing compliance headwinds this month that pushed bonds wider.

Proposed regulatory changes from US President Donald Trump and the Department of Health and Human Services seek to lower out-of-pocket drug costs for consumers, which may force companies to shoulder more of the cost.

The regulation is undergoing a month-long comment period that ends in early April and has already caused bonds of PBMs such as UnitedHealth Group (A3/A+/A) and Cigna’s Express Scripts to widen.

For example, UnitedHealth’s 4.75% 2045s traded as high as 121bp over Treasuries, up from T+111bp prior to the proposed regulation in early March, according to MarketAxess data. The bonds have since retraced some of that widening to trade at 119bp over Treasuries as of Thursday.

Cigna bond spreads have moved around 10bp wider, trading as high as 157bp over Treasuries since the regulation was introduced.

The proposal would end drug manufacturer rebates to PBMs when negotiating pricing for Medicare Part D and Medicaid managed care programs.

The administration argues that consumers’ out-of-pocket drug costs will be lowered through the elimination of the rebates, which have generated US$89bn in revenue for the PBM industry, according to the nonprofit research organization Altarum Institute.

“In this environment, with this administration, the pharmaceutical names are probably skewed to the downside,” said Mark Alexandridis, chief investment officer for First Principles Capital Management.

“People expect more intervention from the government in terms of controlling prices and that is a narrative that surprisingly works on both sides of the (political) aisle.”

One of the PBMs most affected is CVS, which closed its acquisition of Aetna last year in a transformational M&A deal that newly puts the retailer in the thick of these issues at a time when it is struggling to meet deleveraging targets. nL8N20Z7EQ

The regulation would likely cause CVS to raise premiums for prescription drug coverage to offset the loss of rebate revenue, according to CreditSights.

“Those rules only apply to the Medicare and Medicaid side of the business and doesn’t really impact their commercial business,” said James Goldstein, analyst at CreditSights.

“CVS and other PBMs have said they don’t see an immediate impact because commercial is such a bigger part of the business.”

Still, the proposal sent CVS bonds wider. The 5.05% 2048s traded at 212bp over Treasuries Friday, up from 197bp plus Treasuries around the introduction of the new rules.

Pharmaceuticals