The Wolfe Healthcare team hosts a webcast with Dr. Gyorgy Abel & Bob McGonnagle to discuss the outlook for COVID-19 testing in different treatment settings and how the virus will impact the clinical lab landscape
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As COVID-19 forces the U.S. population to increasingly shelter-in-place and the healthcare system to preserve capacity, it has become increasingly clear that there will be significant impacts on elective utilization, including physician office visits – which are the basis of most lab volume. DGX confirmed this by withdrawing 2020 guidance (expected) and noting that volume declines in the second half of March were in excess of 40%, inclusive of the benefit from COVID-19 testing. We think the declines are likely to grow as several other major cities unfortunately appear to be heading towards a NYC-like outbreak. We are still working through our models, but the initial implications for EPS are ugly – EPS could be down >50% given the high fixed-cost nature of the lab business.
We have updated our generic drug market tracking files to reflect February data. Overall, generic sales decreased 1.7% y/y in February compared to the 2.7% increase in January, with lower volume growth more than offsetting moderating deflation. Deflation on mature generics improved for the second consecutive month following the higher rate of price deflation that we noted with the December data, possibly driven by COVID-19 disruption and / or stocking activities. So far in Q1 our data suggests chain store acquisition costs have declined faster than independent pharmacy acquisition costs, which implies that distributor margins for independents are expanding.
The Wolfe Healthcare team hosts a webcast on alternate Fridays at 10:30AM ET to discuss healthcare news and themes for the week. Presenting analysts include Justin Lake (Healthcare Services), Steve Baxter (Healthcare Technology & Distribution), Tim Anderson (Global Pharma), Akash Tewari (SMID Cap Biotech & Spec Pharma), and Steve Beuchaw (Life Science Tools & Dental).
Late last night the text of the latest Senate stimulus bill was released. The Senate has since passed this version of the stimulus. As it relates to labs, the biggest change vs. the initial Senate and House bills is to pause scheduled Medicare Clinical Lab Fee Schedule reimbursement cuts driven by PAMA for 1 year in 2021. We see this as a well-deserved win for the industry, which has stepped up to the plate to ramp COVID-19 testing capacity and will likely shoulder a significant NT burden from lost utilization as a result of social distancing / shelter in place. Assuming the stimulus bill is passed by the House and signed into law, 2022 will now be the last year of PAMA reimbursement cuts required by the current data collection. The benefit of incremental cash flow in 2021 is worth about 1% to each company’s current equity value.
Over the NT, both the amount of COVID-19 testing and the amount core testing volume deferred or lost remain extremely difficult for us to forecast – which we imagine is almost certainly true for lab management teams as well. We have put together a framework to assess the potential earnings at risk for DGX and LH. Our sensitivity model allows the user to make changes to different types of physician office visits (driver of most lab testing), client bill revenue, patient collections, and importantly factor in the benefit from COVID-19 testing. On the cost side, the user can specify incremental / decremental margins for each revenue stream and also layer in SG&A savings. The results are compared to our current estimates, which we have not yet adjusted and thus are still consistent with each company’s 2020 guidance provided in with Q4 results.
Following the introduction of the Senate Republican stimulus bill over the weekend, last night House Democrats introduced their own stimulus bill. In the House bill healthcare providers would have access to a $100B fund and an additional $80B in low-interest loans – this compares to $75B available to providers in the Senate bill. Despite the lab industry’s rapid response to increase COVID-19 testing capacity, there are no dedicated provisions in either bill providing relief to labs. The $100B is to be used “for making payments, through grants or other payment mechanisms, to covered entities to cover or reimburse health care related expenses or lost revenues attributable to the COVID–19 outbreak.” The House bill also qualifies that HHS “shall prioritize making such payments for charity care furnished, covered entities with high volumes of health care related expenses or lost revenues directly attributable to COVID–19”.
The Wolfe Healthcare team hosts a webcast on 10:30AM ET to discuss healthcare news and themes for the week. Presenting analysts include Justin Lake (Healthcare Services), Steve Baxter (Healthcare Technology & Distribution), Tim Anderson (Global Pharma), Akash Tewari (SMID Cap Biotech & Spec Pharma), and Steve Beuchaw (Life Science Tools & Dental).
Given the highly uncertain outlook for earnings and cash flow this year as a result of COVID-19, we wanted to assess each company’s comfort level vs. financial covenants where applicable and benchmark liquidity vs. recent cash flows. In short, liquidity is 2-3x annual cash flow and the CROs average a ~45% EBITDA buffer vs. covenants.
Distributors have outperformed the S&P 500 by 6% since the equity market sell-off kicked off on 2/24/10 but have underperformed the XLV by 2%. ABC has outperformed the XLV by 5%, while CAH and MCK have unperformed by 5% and 6%, respectively. We see ABC’s outperformance as a function of having the lowest leverage in the group and also the most exposure to the core U.S. Pharma distribution business. As we looked back at prescription trends during the financial crisis, we were surprised to see how well total prescriptions held up – total prescriptions never declined on a quarterly basis during 2008, 2009, or 2010. While the uncertainty introduced by COVID-19 is a completely different challenge vs. the financial crisis, we would expect prescription trends to hold up much better than other areas of health care utilization – likely boding well for distributors over at least the next couple of quarters.
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