As expected Sanders wins the NH primary with Buttigieg/Klobuchar close behind. Based on Sanders’ narrow margin of victory (<4%) 538’s model forecasts he has 48% chance of winning the majority of delegates followed by None (27%) and Biden (15%). With the field still rather spread out and Bloomberg gaining mindshare into Super Tuesday, it is increasingly possible that there is no clear winner going into the Democratic Convention in July and we expect investors to focus on this potential outcome – see convention rules here. Given results in-line with expectations we expect focus to shift to polling changes heading into NV on 02/22 and SC on 02/29 and from here we see MCOs still pricing in approximately 50/50 odds of Sanders getting the nomination vs. a more moderate candidate. See Exhibits 1 and 2 on pages 2 and 3 for current MCO group multiple and our view of sector multiple shifts depending on election outcomes.
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DVA Q4’19 OI of $463M came in above WR/Cons $446M/$447M, and adj. EPS of $1.86 beat WR/Cons $1.68/$1.66 – the OI beat vs. our model was driven by lower patient care costs and EPS was further helped by a lower tax rate in the qtr of $0.14. We est. core US Dialysis OI growth came in at ~6% in 4Q vs. our est. of (1%) again driven by lower patient costs vs. our model, with lower corp/Int’l somewhat offsetting. Importantly, DVA issued updated EPS guidance of $5.75-$6.25, up $0.50 vs. previous including implied OI of $1.495B-$1.638B (more below) that bracketed Consensus’ $1.522B but was above WR’s $1.470B on higher calcimimetics earnings and benefit of AB 290 court injunction in CA. We est. this implies ~flat to slightly positive core growth in 2020 – see our OI bridge on page 2. On Med Adv in 2021 the company continues to indicate limited visibility here and expects a “gradual” ramp in penetration over time.
The Iowa Democratic Party (IDP) released the first look at results from the IA Caucuses and currently Buttigieg leads (26.9% of SDEs) trailed closely by Sanders (25.1%) with Warren (18.3%), Biden (15.6%), and Klobuchar (12.6%) rounding out what appears to be the top candidates, see exhibit 1 on page 2 for more. We note that Sanders currently leads both First and Final Alignment votes but not SDEs. Compared with polls leading up to the IA caucus Biden is underperforming, Buttigieg/Warren are outperforming, and Sanders/Klobuchar are ~in-line. While nice to get some information regarding last night, the race is too tight and too many precincts are unreported to declare a winner (38% of precincts are unreported / 36.1% of SDEs are unassigned). Complicating matters more, the IDP has not committed to a timeframe for the next data release which may further reduce the relevance of Iowa’s outcome/increase the importance of NH, especially if the IDP releases data after the NH primary on 02/11.
Biden’s national polling aggregate is basically unchanged since our last update and he remains the favorite both in polling and RCP betting average at 35% odds to win vs. Sanders at 31%. From here it is clear that Iowa will be a significant catalyst. From a polling perspective, as we discuss below, after last weekend saw Sanders with strong polling results in IA this weekend Biden bounced back leading in 2 separate IA polls. With no less an authority than Nate Silver’s 538 Politics indicating that a IA win would catapult Sanders / Warren in front of the Dem field from a probability perspective and a Biden win here could make him a near lock to win (again more below), we see Feb 3 as a meaningful marker for the HC sector in general and MCOs in particular as the fundamental backdrop remains fairly benign in the NT after a solid UNH print last week and shaping up strongly for 2021 on the back of accelerating earnings growth post HIF repeal as outlined in our 2020 Outlook.
According to Politico, the Supreme Court has rejected Democrats’ request submitted earlier this month to fast track the ongoing ACA lawsuit to the high court before election. For background, recall the 5th Circuit Court of Appeals ruled on Dec 18th, 2019 that the individual mandate was unconstitutional, but sent back the case to the lower district court to assess how much the rest of the law can stand. If correct, the process of briefing, argument, and ruling will restart at the lower court which took 291 days from the start to finish when the lawsuit was first filed. From there the Court of Appeals will have to rule again which will likely delay any Supreme Court decision until 2021 / 2022. See Exhibits 1 and 2 for more on timeline of the case & plans’ exposure to the Medicaid expansion and exchange earnings by MCO with MOH/CNC/ANTM most impacted.
The latest Monmouth University Poll released today (1/13/20) shows Biden taking the lead from Pete Buttigieg who led during the most recent poll in early November, followed by Sanders who continues to show strong momentum in IA moving up to #2 from #4 previously. Biden took the lead with 24% from previous 19% with Sanders moving to #2 at 18% from previous 13%, while Buttigieg dropping to 17% vs. previous 22%, and finally Warren dropping to #4 at 15% vs. previous 18%. Despite Biden’s lead in this poll being encouraging, it is clear that the poll reiterates Sanders momentum on the heels of the Des Moines Register Polling from Friday (more below) with Sanders in the lead and Biden 4th, weighing on MCOs today with the sector under-performing the S&P 500 by 3-4%.
Late day on Friday (1/10/20) the Des Moines Register issued its updated poll on the Iowa Democratic Caucus, with Bernie Sanders taking the lead from Pete Buttigieg who led during the most recent poll in late November. While Sanders took the lead, the polling remains extremely tight with Sanders moving to 20% from previous 15%, with Warren remaining #2 at 17% vs. previous 16%, Buttigieg dropping to 16% vs. previous 25% and finally Biden at 15% vs. previous 15%. Given the historical importance of early state primaries we expect there will be some heightened concern around potential increased Sanders momentum. That said, it is clear that Biden remains the front runner and our conversations with investors indicate an expectation that Sander’s will likely face an uphill battle post IA/NH/NV primaries.
Earlier this afternoon (1/6/20) the Supreme Court requested Republican-led states challenging the ACA to respond to a petition submitted by Dem-led defendants last Friday to fast track the ongoing ACA lawsuit to the high court. Attorneys from the red states will have until this coming Friday, Jan 10th, to respond. For background, recall the 5th Circuit Court of Appeals ruled on Dec 18th, 2019 that the individual mandate was unconstitutional, but sent back the case to the lower district court to assess how much the rest of the law can stand. Contending that the ruling by the Appeals court could delay a final resolution of the case much longer, attorneys from Dem-led states decided to call on the Supreme Court to take up the case “for the sake saving lives and ending uncertainty in our health care system”, said CA Attorney General Xavier Becerra who is heading the legal defense. We note only 4 out of 9 votes are need for the Supreme Court to hear the case.
We see a continued reasonable operating environment for managed care heading into 2020 featuring a strong Medicare Advantage growth outlook, signs of stabilization in Medicaid enrollment / risk pool pressure and benign commercial cost trends per our proprietary NFP channel checks all indicating reasonable visibility around 2020 earnings performance.
According to the Associated Press, a federal judge granted a preliminary injunction on Monday (12/30) that would bar implementation of AB 290 while a lawsuit against it proceeds through the courts. The American Kidney Fund (AKF) applauded the decision by the judge and plans to “immediately re-open the program to new grant applications who qualify for assistance”. Recall that the AKF has stopped taking on new patients as of October 1st which have declined an avg of 90 new patients a month – see our previous note here. DVA’s 2020 guidance includes an impact of $25M-$40M from AB 290 and we incorporated a ~$35M impact into our model which could prove to be conservative if the AKF continues its operations in CA until the ongoing lawsuit concludes. According to the court doc, the Court proposed an accelerated litigation timeline of 6-7 months – see page 2.
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