Today (5/16/19) the Kentucky Cabinet for Health and Family Services (CHFS) and Department of Medicaid Services (DMS) released its Medicaid Managed Care re-procurement RFP. There are currently 1.22M enrollees statewide, with WCG / CVS-AET / HUM / ANTM from our coverage universe managing significant amounts of enrollment along with NFP plan Passport. With this new RFP the DMS will contract with up to 5 insurers statewide consistent with the number of current incumbents. The KY DMS will also award one of the selected MCOs to provide services in a new Foster Care program called Supporting Kentucky Youth (SKY), which we est. to be a $150M oppy. Most importantly the new contract will now require PBM pricing transparency from MCOs which will have to disclose all contracted PBM terms to the state and utilize a pass-through pricing model where plan’s drug reimbursement to PBM must = PBM’s reimbursement to pharmacy.
Search Coverage List, Models & Reports
Search Results1-10 out of 41
Today (5/16/19) after market close, CMS issued a final MA / Part D rule (final rule / fact sheet), which created a lot of confusion as to whether the rule means the agency is not implementing the proposed HHS rebate rule in 2020. Based on our conversations with consultants / MCOs, as well as our interpretation of the language in the rule, we are highly convicted that the rule does not discuss manufacturer rebates at POS but only confirms that CMS will not implement DIR (performance-based payments from pharmacies to plans) at POS in 2020 – see page 2 for the exact language from the CMS press release.
We are revising our estimates for MCO / Drug Retail coverage post 1Q19 results. We are also updating our price targets across our coverage universe to reflect 1) revised earnings est laid out in this note and 2) an incremental group discount vs. S&P given the ongoing political uncertainties. See table below, links to all updated models and new PT build-up on page 2 for further details. We continue to rate the MCO group Market Perform with top picks remaining ANTM & UNH.
CVS reported Q1 adj EPS of $1.62 above WR/Cons of $1.51/$1.50 and above the high end of the 1Q guide range of $1.49-$1.53, primary driven by robust HCB and better PBM earnings as well as lower int exp. Total op profit of ~$3.6B was ~5% above WR/guidance of ~$3.4B and ~11% above Cons of ~$3.2B. FY19 EPS guidance of $6.68-$6.88 (WR/Cons at $6.87/$6.79) was raised by ~5c at the mid-point (vs. the 1Q beat of 11c) to $6.75-$6.90. We note HCB upside likely driven by strong PYD which similar to AET methodology is not in guidance – we est. typical $0.10 benefit to #s. Overall results better than expected for the qtr., look for questions on new cost cutting initiative ($1.5-$2.0B of run-rate cost savings by 2022) and lower than expected PBM retention for 2020 as well as headwinds / tailwinds update.
We are hosting a webcast today at 11AM ET to discuss several topics that have arisen over the past few weeks including thoughts on #s post- ANTM & HUM investor days, our detailed state / regional overlap analysis for CNC-WCG, and latest thoughts on the Re
CareSource, a nonprofit Medicaid focused MCO w/ ~2M members, today announced the transition of PBM to ESRX from CVS beginning Jan 1, 2020. We estimate CareSource had an annual drug spend of ~$1.8B in 2018, which translates to $0.02-$0.04 to 2020 EPS, assuming a margin of ~2%. While the impact seems manageable, we remind investors that 2020 is a significant year for CVS in terms of contracts up for renewal at ~$47B vs. previous years and our discussions with the co. suggest contract repricing/retention could be a headwind to keep in mind for 2020 vs. previous years (see our slide deck highlighting CVS’s 2019/2020 moving parts here). Note that we believe CVS has already lost a large (~$1B spend) NFP MCO contract to OptumRx for 2020.
WBA reported Q2 adj. EPS of $1.64, vs. WR/Consensus of $1.75/$1.72 with the miss primarily driven by the weakness in the US Retail Pharmacy business. Adj. op profit of $1,935M (down 10.5% y/y) was meaningfully below WR/Cons of $2,112M/$2,082M, with US Retail ($1,455M vs. WR/Cons of $1,643M/$1,659M, down ~12% y/y) well below and Pharma Wholesale ($225M vs. WR/Cons of $231M/$238M, down 2.6% y/y) modestly below est. partially offset by better results in International Retail ($256M vs. WR/Consensus of $237M/$204M, -8.6% y/y). WBA lowered FY19 EPS growth guidance to flat y/y from 7%-12% growth, citing reimbursement pressure, lower generic deflation, as well as continued market challenges in the US and UK. Assuming share repurchase benefit of +5% holds, new guide implies 2H19 NI to be down -6.5% y/y. Meanwhile, the co. provided LT EPS growth target of mid-to-high single-digit growth vs. low-double digit growth target communicated a few years back.
Monday ( afternoon CMS released the 2020 Medicare Advantage Rate Announcement with rates improving from the Advance Notice, with CMS’s estimate of revenue increasing by 94bps to 2.53%, down from 2019 rate of 3.4% pre HIF holiday benefit. We note this does not include a benefit from coding growth unlike previous total reimbursement estimates produced by CMS pre-2018. Overall the rates are encouraging, and in our view would set up a solid benefit / membership growth outlook ex expected HIF return. With HIF return we see net rate in the 0-1% range, likely forcing plans to focus on improving coding, medical management and SG&A efficiency vs. reducing benefits / margins for 2020. Look for plan commentary on upcoming Q1’19 earnings conference calls.
CNC announced (press release, infographic also on page 4 / has summary details, investor presentation) the acquisition of WCG for $305.39 per share, a 32.1% premium to yesterday’s close and ~21.0% premium to 30-day VWAP. WCG shareholders will get 3.38 shares of CNC and $120 in cash, with transaction close expected 1H2020. Expected synergies are $500M, and deal is expected to be slightly dilutive year one and MSD accretive year two. See more key details below. We will be hosting a webcast post-deal call around ~9:15AM – invite should be in your inbox soon.
Yesterday (3/26/2019) Bloomberg reported CNC has held discussions about a potential takeover of WCG. At first glance we are surprised, not at CNC’s interest in the asset given WCG’s multi-year earnings growth outlook and attractive Medicare platform but rather CNC’s management stepping up for another meaningful M&A deal post HNT and Fidelis deals in recent years coupled with the company’s own currently modest valuation / leverage levels and relative lack of estimated accretion. At this point it is impossible to do more than speculate as to motives, probability of sale and potential sale price – but below we walk thru a # of considerations and potential read-thru’s. Overall, we would expect WCG stock to be up meaningfully tmr with CNC tougher to call but potentially facing pressure given estimated lack of accretion.
- 1 of 5
- next →