Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast to cover his takeaways from the recent management meetings of DVA and HUM & other MCOs.
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We recently had the opportunity to host investor meetings with DVA CEO Kent Thiry, CFO Joel Ackerman and IR Jim Gustafson. Meetings focused the CA ballot initiative, the Choice and PATIENTS Acts, capital deployment, CPA / AKF and core performance. While much of what the company said was not new in our mind, it is clear CEO Thiry is confident in both the close of DMG and getting a CBO score on the Patient Act “relatively soon”. On the CA ballot initiative, the company is well into the process of working on its strategy and has assembled a strong coalition. We expect more on $ and strategy on Q2 call once 6/28 deadline to pull the ballot initiative has passed. At this point with stock at 12.3x 2019 cash EPS we see positive risk/reward while acknowledging the stock could remain range-bound in intermediate term until there is clarity on the ballot initiatives which could take until November. Reiterate Outperform.
Yesterday (06/07/18) the WSJ and other news outlets reported that the Justice Department supports a legal challenge to the Affordable Care Act brought by 20 state Attorney Generals and that the DOJ won’t defend the constitutionality of the ACA. The lawsuit argues that because the Individual Mandate penalty was set to $0 last year, the entire Affordable Care Act was made unconstitutional. The DOJ doesn’t seem to support the argument that the entire ACA is now unconstitutional, but a memo produced by DOJ identified the provisions on guaranteed issue, community rating (charging same price regardless of health status) and age/gender pricing protections as being “inseverable from the mandate” and invalid / unconstitutional as of January 1. The issue appears far from being decided as the AG lawsuit still needs to make its way through the court system. However, this news is likely to unsettle MCOs offering coverage in the individual market given the potential for significant market instability / shrinkage (vs. 15M individuals today per CBO) if this challenge is successful. Subsides and risk adjustment would likely prevent the Individual market from fully returning to pre-ACA status but there would still be significant concern. MCOs are currently in the process of submitting 2019 rate requests to state insurance officials under the assumption that the ACA protections described above will remain in place. The DOJ’s decision to not defend federal law is described as very unusual although the WSJ notes that the Obama administration did something similar with the Defense of Marriage Act. A letter from Attorney General Jeff Sessions to congressional leaders indicated the decision on the ACA was made with approval from President Trump.
Last night (06/07/18) CNBC and Politico reported that Dr. David Feinberg, CEO of Geisinger Health System, was at one point the top choice to lead the Amazon / Berkshire / JP Morgan Chase health care partnership but has since said he is committed to saying at Geisinger. Dr. Feinberg was the President of UCLA Health System / CEO of UCLA’s hospitals before joining Geisinger. Feinberg’s biography can be found here (also on Page 2). The report says that the top 10 candidates wrote white papers on how they would fix the health care system and went through a series of interviews. The final 3 candidates interviewed with JPM CEO Jamie Dimon, who passed his 2 favored candidates to interview with Berkshire CEO Warren Buffett. Buffett then passed his favored candidate to interview with Amazon CEO Jeff Bezos, who could have vetoed that choice.
Earlier this morning (06/07/18) Warren Buffett confirmed on CNBC that the healthcare venture with Amazon and JPM had chosen a CEO and would likely make an announcement within two weeks. Recall the initial formation of the JV is being spearheaded by Todd Combs (investment officer, Berkshire), Marvelle Sullivan Berchtold (Managing Director, JPM Chase) and Beth Galetti (Senior Vice President, Amazon) and is still in early stages. The goals discussed include aligning incentives and studying waste/fraud/admin costs among others. Please see here for our initial thoughts on the venture and find an update on Amazon’s pharmacy plans here.
Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast of his lunch featuring DaVita, Inc. managment, Joel Ackerman, Chief Financial Officer, and Jim Gustafson, Investor Relations.
Earlier today (5/30/2018) the State of California Elections Division certified that the ballot initiative to cap dialysis clinic reimbursement at 115% of eligible costs has collected the required # of signatures to be eligible for the General Election. This was widely expected given previous media coverage discussing signature collection totals well above the required amount. The next key date here is 6/28/18, which is when the California Secretary of State will certify the initiative as qualified for the General Election unless it is withdrawn by the proponents. Once certified by the Secretary of State, the ballot initiative can no longer be withdrawn. We note that in the meantime the dialysis industry has filed suit against the ballot initiative (email us for a copy) and that we expect the California Supreme court to come back with a decision on the legality of the ballot initiative in the next few weeks. Should the SEIU go forward with the ballot we expect the dialysis industry to begin ramping up messaging over the summer and to significantly outspend the supporters of the initiative going into election day on 11/6/18.
Yesterday (5/16/2018) there was an informational hearing in California on the ballot initiative to cap dialysis clinic reimbursement at 115% of eligible costs. The hearing was held in front of the CA Assembly and Senate Health Committees. The hearings included an overview of the dialysis industry and the proposed legislation, analysis from the California Legislative Analyst’s Office (LAO) and testimony from proponents / opponents. Overall, we see the hearing as a slight positive given it appeared to lay out the case for potential access to care issues should the ballot pass – effectively laying the groundwork for the industry campaign against the issue with voters should SEIU decide to proceed. We note that the LAO is expected to issue a final report on their view of the ballot initiative sometime in the next month or so. See our slides here on issue for background.
DVA reported adjusted EPS (continuing ops) of $1.05 compared to WR/Consensus of $0.94/$0.91 with U.S. dialysis ahead of our est. at $433M OI vs. Wolfe $411M est. We note that Q1 benefited from $24M of PY Medicare rev / OI (management discussed on 4Q17 call – we hadn’t added to our #) as well as $17M of PY shared savings rev / OI (not expected by Street but mgmt. indicates in range as well). DVA reiterated FY Kidney Care OI guidance of $1.5-$1.6B, CFO guidance of $1.4-$1.6B and tax rate attributable to DVA of 26.5%-27.5%. Overall we view the quarter as relatively in line ex the moving pieces – with the one-timers putting more emphasis on DVA delivering the top-end of the guidance range (which it typically has – see Exhibit 1 Page 3) to keep 2019 #s intact given $47m headwind from one-timers from 2018 run-rate. For now we maintain ests and PT at $80.
This afternoon (04/16/18) CNBC reported that Amazon is stepping back from its effort to sell / distribute pharmaceuticals to business customers including hospitals. The report notes that Amazon has found the pharma business more challenging than expected given difficultly winning business from traditional procurement channels (distributors and GPOs) and retail / delivery infrastructure that hasn’t been set up to deal with temperature-sensitive drugs. While Amazon could revisit the opportunity at a future date, the news is clearly a relief to incumbents in the pharmacy supply chain with PBMS (including UNH) / pharmacies / distributors all outperforming significantly post the news.
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