We are updating our tracking files for the latest COVID-19 testing volumes and capacity. LH’s last testing update was provided on 6/27, with the company running ~122k molecular tests / day, double the ~61k / day the prior week. LH’s molecular testing capacity remained stable at 130k / day. LH also ran 25k serology tests / day, below ~29k / day the prior week.
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We have updated our generic drug market tracking files to reflect May data. Overall, generic sales decreased 9.3% y/y in May compared to the 8.1% decrease in April and 8.5% increase in March, which included the pull-forward of prescriptions ahead of COVID-19 social distancing / lockdowns. Interestingly, price deflation intensified in May but was almost entirely driven by inhalant molecule Albuterol – excluding Albuterol, deflationary trends remained modest compared to recent months. So far in Q2 and during Q1 chain store generic acquisition costs declined faster than independent acquisition costs, which implies that distributor margins for independents are expanding. See Slides 3-13 for visuals illustrating the trends discussed below.
This morning (06/25/20) DGX posted a new entry to their COVID-19 media statement page. The company provided an update on demand / volume growth, capacity growth, turnaround times, and workforce actions. After moving away from weekly COVID-19 testing volume disclosure, we suspect today’s release was prompted primarily by expectations that molecular testing turnaround times are expected to slow in the near term.
As noted earlier by Wolfe’s Healthcare Services Analyst Justin Lake, according to guidance released by the Trump Administration yesterday insurers are not required to cover COVID-19 testing in the context of surveillance or employment / return-to-work programs. See Page 2 for the key text. We would note that 80% of covered workers at large firms are enrolled in self-funded plans (see Page 2 for the breakout), so for these firms the employer would bear the cost of COVID-19 test regardless of the guidance issued today. We expect large and thus primarily self-insured employers to drive the majority of the return-to-work testing opportunity. As discussed below, our recent meetings with DGX acknowledged this potential reimbursement dynamic, with the company remaining confident it can utilize its PCR testing capacity with entities where reimbursement will not be challenged.
In May, my wife and I were tested for COVID-19 antibodies through LH. I wrote about the experience here. My wife’s insurance is through CVS (AET) and my insurance is through UNH. Combined, CVS (AET) and UNH insure ~45M commercial members. Both of our claims have been recently processed and paid at 100% of the Medicare serology reimbursement rate of $42.13. Pages 2 and 3 have screenshots of our claims. We believe these data points are worth flagging as there has been some recent discussion of serology reimbursement challenges by lab industry billing experts.
Latest Disclosures – We are updating our tracking files for the latest COVID-19 testing volumes and capacity. LH’s last testing update was provided on 6/19, with the company running ~61k molecular tests / day, down from ~82k / day the prior week. LH’s molecular testing capacity is now 130k tests / day vs. 110k / day the prior week. LH also ran ~29k serology tests / day, above ~26k / day the prior week. We note that DGX has appeared to move away from publishing weekly updates on COVID-19 testing volumes and capacity (now second week without an update). The lack of an update leads us to believe volume trends have generally been consistent with DGX’s most recently reported weekly data on 6/8 – although as we note below DGX’s recent share ACLA testing would suggest closer to 100k molecular tests / day.
Our Accounting & Tax Policy team recently published a report discussing the potential for corporate tax reform with the U.S. government’s budget deficit at a 75+ year high. We expect tax reform and the upcoming presidential election to garner increased attention in the months ahead, and our note discusses the expected impact to our coverage.
We recently hosted meetings with DGX CFO Mark Guinan and IR Shawn Bevec. As expected, much of the discussion was focused on COVID-19 testing dynamics and the outlook for recovery of core volumes. Most notably, we came away from the discussion with increased confidence DGX will fully utilize the molecular / PCR testing capacity it is ramping towards. Core trends are clearly headed in the right direction but are obviously dependent on a potential second wave and whether patient / consumer behavior changes post COVID-19.
According to a report from Medidata Solutions, new patient enrollment in clinical trials decreased 74% y/y in May. This compares to a 79% decrease in April and a 65% decrease in March. Spain, France, and the U.S. showed the most improvement vs. April while China, South Korea, Italy, and Japan somewhat surprisingly had larger y/y declines in May than April. Endocrine, respiratory, and oncology were the therapeutic areas showing the most improvement in May. We did not much expect much overall improvement in new patient enrollment during May, but these trends will be increasingly important to monitor in the coming months. While CROs have made significant progress mitigating the impact of COVID-19 on trials already in progress, the downstream impact of disrupted recruiting for new trials remains an area of uncertainty.
We are increasing our 2020 estimates to adjust for a faster pace of core volume recovery. Recall that at a conference appearance last week DGX disclosed that core testing volumes have recovered faster than expected and Q2 adjusted EPS could be “in the range of breakeven to slightly profitable” vs. expectations for a loss shared on 4/22/20. While our 2020 EPS estimates increase materially for DGX & LH, we are leaving our core revenue assumptions for 2021 and 2022 unchanged. Our target prices increase due to market multiple expansion - DGX increases to $124 (17x 2022 EPS) from $116 (16x) and LH increases to $202 (15x 2022 EPS) from $188 (14x). We maintain our Peer Perform rating, as there continues to be very low visibility into 1) base earnings and 2) the magnitude and duration of any COVID testing benefit. However, if the market anchors on 2H20 / 2021 results and doesn’t look through the COVID-19 testing contribution, the stocks could outperform.
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