We are lowering our distributor target prices to reflect a worse than previously contemplated opioid litigation settlement. While there has been significant news flow for opioid manufacturers over the past several weeks, we continue to see the Bloomberg report from early August on distributor negotiations with state attorneys general ($10B opening offer made by distributors, $45B demand from AGs) as the best data point from which to start thinking about exposure. If that report is credible, it would seem to suggest $15B as a more reasonable settlement “floor”. We now explicitly assume a $20B total headline settlement for the distributors, with a NPV approximately 2/3 that amount after considering potential offsets.
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Wolfe Research Healthcare Technology & Distribution Analyst, Steve Baxter, hosted a webcast to discuss why he estimates $20B, impact on target price and estimates (given less capital deployment), thoughts on what is priced in and valuation, and recent opioid newsflow and developments.
Late this evening (9/11/19) Judge Polster of the U.S. District Court for the Northern District of Ohio certified the creation of a nationwide negotiation class in the ongoing opioid multidistrict litigation (MDL). As discussed below, the creation of the negotiation class could potentially make it easier to arrive at a global settlement. We are not surprised given Polster’s apparent support for the idea in an early August hearing and more recently a supportive brief filed this week by one of the special masters in the case tasked with evaluating the proposal. Clearly this gives local governments more leverage in negotiations to reach a global settlement, but it could also complicate discussions further given a clear desire by state attorneys general to control the process – 37 states the District of Columbia objected to the proposal. We note that the state cases against opioid defendants remain outside of both the MDL and the negotiation class.
This afternoon (9/3/19) after the market closed PRAH announced that KKR intends to offer 6.7M shares for sale in a secondary offering, worth $651M at today’s closing price of $97.59. This represents KKR’s entire remaining ownership and 10% of shares outstanding. Today’s announcement does not come as a surprise given the timing and magnitude of previous secondary offerings completed by KKR since PRAH’s November 2014 IPO.
We have updated our generic drug market tracking files to reflect July data. Overall, generic sales increased 3.7% y/y in July – an acceleration from recent trend that was partly driven by a pickup in y/y volume growth. Deflation has remained quite stable. Our analysis now suggests stable margins for independent pharmacy customers in July vs. modest margin pressure in calendar Q2. See pages 2-5 for visuals illustrating the trends discussed below.
Today (8/27/19) after the market close SYNH disclosed that the Securities and Exchange Commission (SEC) notified SYNH’s outside counsel that it has concluded its investigation and based on the information provided to the SEC to date, the SEC doesn’t intend to recommend an enforcement action against SYNH. Recall that on 2/21/19 SYNH was notified that the SEC had commenced an investigation into the company’s revenue accounting policies, internal controls and related matters and requested document retention for the periods beginning 1/1/17. Today’s announcement is a clear positive and we are raising our target price to $59 (from $56) to reflect the removal of this overhang.
Today (8/26/19) after market close an Oklahoma judge ordered Johnson & Johnson (JNJ) to pay the state $572M following a bench trial in the state’s lawsuit against opioid manufacturers. The judgment is available here. JNJ has already said that it will appeal. Importantly, we note that the $572M payment is “the sum necessary to carry out the Abatement Plan in year one”. While witnesses testified that abatement will take at least 20 years, the state did not present sufficient evidence of the amount of time and cost necessary beyond year one. It is unclear to us whether this leaves the door open to additional payments in future periods. See Page 2 for the excerpt. Recall that Purdue Pharma ($270M) and Teva ($85M) reached settlements in this lawsuit before going to trial. If $572M is the total JNJ payment amount, we see the outcome as better than expected / feared. However as discussed below, we note that extrapolating nationally and considering both state and local government lawsuits woul
On Tuesday 8/6/19 SYNH reported 2Q19 results that were above expectations and raised guidance slightly. Overall, we saw the quarter as an improvement over Q1 given y/y margin expansion, stronger quarterly clinical book-to-bill, and a sequential step-up in clinical backlog burn as solid trends. Our estimates increase slightly to reflect the improved 2019 earnings base. With 2Q19 results we are rolling our target price forward to year-end 2020, with our target moving to $56 from $48. We reiterate our Peer Perform rating – while SYNH trades at a ~4x discount to the group, a solid quarter is not enough for us to be prepared to step in given the uncertainty around the SEC investigation and recent bookings volatility.
On Thursday (8/8/19) CAH reported fiscal 4Q19 results that were above estimates / guidance and issued fiscal 2020 guidance. EPS guidance was generally in line with our estimate and buy-side expectations but was below consensus. Following guidance and the earnings call our estimates change only slightly, and our expectation is that we will be generally in line with consensus over the next couple of years once consensus is fully updated. With our thesis on 2020 #s having largely played out, the rationale for an Underperform rating is now increasingly predicated on CAH’s higher relative exposure to opioid litigation and a relatively greater potential EPS growth headwind from reduced share repurchase post settlement. We maintain our year-end 2020 target price of $47.
On Wednesday 7/31/19 PRAH reported 2Q19 results that were slightly ahead of expectations. The company raised the low-end of 2019 EPS guidance slightly but had to lower revenue guidance by $85M (2.7% at midpoint) for the year. While lowering topline guidance is almost always creates disappointment, we didn’t see the revised revenue guidance as a complete surprise given the degree of 2H19 revenue growth ramp previously implied and the dependence on burn rate acceleration. As discussed below, our estimates are largely unchanged as stronger margins offset moderated topline growth. With 2Q19 results we are rolling our target price forward to year-end 2020, with our target moving to $109 from $100. We reiterate our Peer Perform rating pending evidence of bookings growth reacceleration but acknowledge that PRAH’s underperformance has created an interesting risk/reward given the material valuation discount vs. ICLR, IQV, and MEDP.
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