BofA Securities predicts that headline risks affecting the Healthcare Tech & Distribution sector in 2024 will likely continue into 2025. Key areas of concern include pharmacy benefit managers (PBMs), retail pharmacies, distributors, fertility benefits, and direct-to-consumer (D2C) pharmacies. While regulatory pressure on PBMs is expected to persist, the analyst believes this will primarily impact profit margins and growth rates rather than lead to major changes in the business model. Potential policy shifts under the next administration could involve adjustments to the Inflation Reduction Act, expanded access to health savings accounts (HSAs), and increased support for fertility benefits.
BofA upgraded Cardinal Health Inc. (NYSE:CAH) from Neutral to Buy. The analyst notes that Cardinal Health’s core pharmaceutical segment is growing faster than its competitors, with this trend expected to strengthen in the coming year. Additionally, the company is benefiting from a unique advantage in its pharmacy benefit management (PBM) business, which could add 2-3 percentage points to earnings per share growth through fiscal 2026. Despite its stronger growth potential, Cardinal’s stock remains undervalued at around $85 per share compared to its peers like Johnson & Johnson (JNJ), which is trading near $174.
The analyst also mentioned that the Inflation Reduction Act could be a significant driver of revenue for Cardinal Health and its customers. He noted that PBM spending, which accounts for about 30% of drug sales, is sensitive to changes in federal policy. For instance, adjustments to the act could lead to increased copays or higher deductibles, both of which would negatively impact PBMs. However, the analyst believes these risks are more likely to be mitigated by cost containment measures taken by companies like Cardinal Health and its customers.
BofA further highlighted that the sector is vulnerable to policy changes in areas such as drug pricing reform, generic competition, and state-by-state drug policies. For example, states with favorable laws for out-of-pocket costs are more likely to expand D2C sales channels, which could drive up competition for PBMs. The analyst also pointed out that the Inflation Reduction Act’s potential adjustments could impact both retail pharmacy margins and customer spending patterns in the long term.
In addition to its PBM exposure, Cardinal Health operates multiple lines of business, including an immunotherapy division and a healthcare consulting arm. This diversification allows the company to mitigate risks associated with changes in federal policy or state laws affecting drug pricing. The analyst emphasized that while PBMs are a significant portion of the company’s revenue, the core pharmaceutical segment is growing faster than its competitors.
BofA also upgraded Henry Schein Inc. (SCHN) from Hold to Buy, noting that its strong same-store sales growth and balanced portfolio of products and services position it well for sustained organic growth in 2025. The analyst highlighted the company’s focus on expanding its digital transformation efforts and increasing penetration in key markets such as optical, orthodontics, and reconstructive practices.
The analyst acknowledged that Henry Schein faces headwinds related to competitive pressures from established names like CVS Caremark (CVS) and Walmart (WMT), which are also investing heavily in healthcare tech. However, he believes the company’s ability to innovate and expand its service offerings gives it a competitive edge.
BofA’s upgrade for Henry Schein was driven by its belief that the company is well-positioned to capitalize on the growing demand for digital health solutions. The analyst noted that Henry Schein’s investment in advanced optical imaging and telehealth platforms could help differentiate it from competitors. Additionally, the company’s focus on expanding its service offerings beyond just selling products could provide long-term growth opportunities.
Henry Schein’s same-store sales growth has been robust over the past few years, driven by increasing demand for digital health solutions and a focus on customer experience. The analyst believes that these trends will continue in 2025, with the company delivering solid organic growth rates.
BofA also mentioned that Henry Schein could potentially benefit from increased competition in its key markets, which could lead to higher margins and revenue stability. However, the analyst emphasized that the company’s ability to maintain its competitive edge through innovation and service differentiation will be critical to achieving long-term growth.
Price action details for both Cardinal Health and Henry Schein were also highlighted by BofA. The analyst noted that both companies’ stock prices have been relatively stable compared to their peers, with Cardinal Health trading at around $85 per share and Henry Schein near $120 per share. However, the analyst believes that the upcoming regulatory environment could provide opportunities for both companies to outperform their peers in 2025.
In conclusion, BofA’s analysis underscores the continued risks facing the Healthcare Tech & Distribution sector, particularly around policy changes and competitive pressures. However, it also highlights the potential for companies like Cardinal Health and Henry Schein to capitalize on growth opportunities in this sector. Investors should carefully consider these risks and opportunities when making decisions about their portfolios.