The Zacks Analyst Blog Highlights: Express Scripts, Medco Health Solutions, CVS Caremark, NextEra Energy and TECO Energy

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Dec 28, 2011, 09:30 ET

CHICAGO, Dec. 28, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Express Scripts (Nasdaq: ESRX), Medco Health Solutions (NYSE: MHS), CVS Caremark (NYSE: CVS), NextEra Energy, Inc. (NYSE: NEE) and TECO Energy, Inc. (NYSE: TE).

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Here are highlights from Tuesday's Analyst Blog:

Mega-PBM Merger: Boon or Bane?

The burning issue across the US healthcare industry is converging with the anxiety of the antitrusts. Now the most discussed question in the industry is: How would the proposed merger of two of the three largest pharmacy benefit managers (PBM) – Express Scripts (Nasdaq: ESRX) and Medco Health Solutions (NYSE: MHS) – impact the competitive market scenario?

This is a long-standing debate where opinions diverge into two broad camps. One side believes the merger between the two leading PBMs would expand the service offering and reduce costs. Others contend the union would have an anti-competitive impact, hurting consumer sentiment and possibly leading to higher prices and inferior service. In this context, the third big player in this niche is CVS Caremark (NYSE: CVS).

Why This Uncertainty?

On the back of non-renewal of several contracts, the proposed merger with Express Scripts can prove to be a lifeline for Medco. If the deal goes through, the combined company will emerge as a dominant player in the PBM space.

Uncertainty persists with the US Federal Trade Commission (FTC) issuing a 'second request' to both Medco and Express Scripts. The FTC is seeking additional information regarding the pending deal, also supported by the American Antitrust Institute (AAI).

Changing Role of PBMs

PBMs have a vital function in controlling prescription drug costs and improving chronic care management. PBMs work on improving prescription drug therapy management for patients and organize a variety of tools to contain drug costs for payers.

Empirical evidence demonstrates that PBMs deliver cost savings for consumers, labor unions, employers, health plans and government programs alike. As per the Congressional Budget Office (CBO) estimate, PBMs have the potential to save as much as 30% in total drug spending relative to unmanaged purchasing.

The researchers claim that PBMs control drug spending by virtue of their advanced technology platforms, with more use of generics and other lower cost medications. The studies also demonstrate that PBMs can limit other health related costs and improve health outcomes by boosting patient adherence to drug therapies.

Patient non-adherence is currently estimated to cost up to $290 billion per year, which represents about 13% of all health expenditures. More importantly, PBMs are playing a significant role especially in the field of clinical management of chronic diseases, where patients account for approximately 96% of drug spending and 75% of total health care expenditures in the US.

The Payoff

Returning to the proposed merger deal, Medco and Express Scripts jointly intend to provide a safer and affordable pharmaceutical coverage by making prescription drugs more reachable for senior citizens, disabled and working families. Additionally, Medco and Express Scripts expect the deal to be beneficial for small businesses and large employers in a difficult global economy. They also expect this to deliver real savings to Medicare and Medicaid beneficiaries and provide a strong base for the US economy.

Economists in favor of the Medco and Express Scripts merger are claiming that the combined PBM can accelerate the annual savings of clients to a large extent. In a recently released study, Jonathan Orszag, who served as an Economic Policy Adviser on President Clinton's National Economic Council estimated that presently Medco and Express Scripts working individually save plan sponsors and consumers roughly $51 billion per year.

Savings from the combined entity will be $87 billion as the mega-PBM merger will be better placed to derive better terms with drug manufacturers and retail network partners. Effective deployment of combined cost saving tools will help benefit the plan sponsors.

In Conclusion

We expect the merger to limit patient choice by forcing them to take more PBM-imposed mail order. The dependence on the combined Express Script-Medco PBM would necessarily amplify the restriction of purchases in the market which is not unlike monopoly in a product market with its resultant evils.

Community pharmacists are expected to come under pressure by the merged entity that will compel them to enter into unfavorable deals under which the community pharmacy patients will be forced into PBM-owned mail order pharmacies to fill their prescriptions at higher costs to health plans. These are also expected to reduce choices of federal and state programs and ultimately lead to higher prescription drug costs paid by plan sponsors and consumers.

The emergence of a new autocrat in the PBM market is definitely against the law of balanced growth and development. We also believe that increased savings are not necessarily beneficial for consumers, especially in the field of health care. When a dominant power forces healthcare providers to accept less money for services, it is likely that the consumer will face a dilution in the level of service rendered.

NextEra Raises Funds for Wind Power

Redwood Trails Wind, LLC, a unit of NextEra Energy, Inc. (NYSE: NEE), has arranged $234 million for the financing of its wind projects in Oklahoma and California. Another NextEra business wing, Golden Winds, LLC, raised $131 million for its three wind farms in California. Both Redwood Trails Wind and Golden Winds are subsidiaries of NextEra Energy Resources, LLC, North America's largest owner and operator of wind and solar electricity generating assets.

The limited recourse term loan of $234 million raised by Redwood Trails Wind for the projects with a generation capacity of 237 megawatts carries a variable interest rate and will mature in December 2029. The loan is mortgaged on the wind energy projects' assets and the ownership interest in Redwood Trails Wind, LLC. The company expects to use the loan amount partly to pay back the capital contributions made by it for the development and building of the wind energy projects.

Golden Winds, LLC raised $131 million in a tax-equity financing for three wind farms in California that have an aggregate capacity of 205.9 megawatts. It issued Class B membership interests to a multinational bank and in exchange will receive approximately $131 million at closing, and a capital contribution of $78 million in early 2012.

NextEra Energy's long-term debts at the end of the third quarter of 2011 were $20 billion versus $18 billion as of December 31, 2010. The debt-to-equity ratio was 47%, deteriorating from 44% at the end of 2010, mainly due to the issue of new debts.

NextEra Energy is a well-managed, high-quality, regulated electric utility that serves high-growth areas of Florida. Looking ahead, we expect the company's earnings growth to likely come from its investments in Florida's utility infrastructure, and growing wind and solar investments.

However, we remain concerned about the volatility in the company's commodity-exposed generation portfolio and the recovery of Florida's economy. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Juno Beach, Florida, based NextEra Energy Inc. is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. The company has both regulated and non-regulated energy-related products and services, with operations in 28 states and Canada. The company mainly competes with TECO Energy, Inc. (NYSE: TE), among others.

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