This morning the WSJ reported that more than 20 states have rejected an opioid litigation settlement framework that would have led to the distributors paying out $18B over 18 years. Instead the group of dissenting states have asked that distributors contribute $22-$32B. There was nothing in the report on whether the requested payment timeframe has changed. We note that the $27B midpoint of the new “ask” is only modestly worse than the $25B we assume in our target prices, which is generally consistent with our view of investors’ line of demarcation here before today’s news – meaning that any settlement less than this amount would be viewed positively.
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This morning (2/13/20) LH reported 4Q19 adjusted EPS of $2.86 vs. Wolfe/Consensus ests of $2.82/$2.80. Operating income was slightly above our estimate (+0.5%), which vs. our model was driven by stronger Diagnostic results (despite weaker than expected organic volume growth) partially offset by lower Covance. LH introduced 2020 EPS guidance of $11.75-$12.15, with the midpoint generally in line with Wolfe/Consensus ests of $11.90/$11.98. LH has outperformed both the S&P 500 and XLV YTD (+6%, +8% respectively), so expectations on guidance may have been slightly higher.
This morning (02/12/20) IQV reported 4Q19 adjusted EPS of $1.74, at the high end of $1.65-$1.75 guidance and above Wolfe/Consensus of $1.72. Revenue was nearly 2% above Wolfe/Consensus, w/ EBITDA in line. IQV introduced 2020 guidance with EBITDA growing 8% at the midpoint, consistent with commentary at the 2019 Investor Day that the company expected growth in 2020 to be “towards the lower end” of 8-11% medium-term EBITDA growth. Overall the quarter and guidance are generally in line with expectations, and the stronger R&DS bookings performance relative to the previous couple quarters should be well received.
This morning (2/11/20) CRL reported 4Q19 adjusted EPS of $2.01 vs. Wolfe/Consensus EPS of $1.80/$1.84 and implied guidance midpoint of $1.83. Both revenue and margins were better than expected in Q4, with DSA driving upside on both fronts. CRL introduced 2020 EPS guidance of $7.45-$7.60 vs. Wolfe/Consensus of $7.28/$7.43, with organic revenue growth expected to be 7.75-8.75% vs. 2019 organic revenue growth of 8.5%. The quarter and guidance should both be well received.
Last week CAH reported fiscal Q2 EPS that was well above expectations and raised EPS guidance by ~6.5% to $5.20-$5.40. Both Pharma and Medical results were above our estimates. The revised guidance also appears to now imbed a significant amount of conservatism in the Medical segment for the second half related to potential disruption from the ongoing recall of surgical gowns and impacted kits, which could allow for CAH to outperform guidance if not entirely warranted. While results are clearly improving for CAH it is unclear to what degree core Pharma growth can be sustained into next year, and we continue to believe ABC and MCK will deliver better earnings growth over the long-term and be less cash-constrained post opioid settlement and thus deserve a higher multiple. Our 2020 EPS moves to $5.40, and our target price increases to $57 from $42.
This morning (02/06/20) CAH reported fiscal 2Q20 adjusted EPS of $1.52, well above Wolfe/Consensus EPS of $1.22/$1.23. Operating income increased 12% q/q vs. guidance last quarter for “modestly lower than Q1” and thus was 16% above our estimate. Both Pharma and Medical EBIT came in ahead of our ests. CAH increased EPS guidance by $0.32 (6.4%) to $5.20-$5.40. Roughly $0.09 (+1.8%) comes from lower interest expense / other income, with the remaining $0.23 (+4.6%) operational. Pharma EBIT growth is now expected to decline LSD % for fiscal 2020 vs. decline HSD/LDD % previously. We note that from our conversations with investors following the JPM Healthcare Conference, a guidance raise was fully anticipated although the magnitude of the raise is likely better.
This morning (2/4/20) MCK reported 3Q20 EPS that exceeded expectations, with upside vs. our model primarily driven by Corporate and Europe. The guidance raise at the JPM Healthcare Conference now looks like it was primarily driven by Q3 results, with implied guidance for Q4 appearing somewhat conservative particularly for U.S. Pharma and Med-Surg. Momentum is strong across most of MCK’s businesses at present and from here we expect stock performance to primarily driven by the sustainability of U.S. Pharma profit growth in fiscal 2021. Our 2020 EPS increases to $14.80 from $14.70 previously, the high end of MCK’s $14.60-$14.80 guidance. Our forward estimates don’t change much coming out of the quarter given that for now we are not flowing the entire lower Corporate expense in fiscal 2020 through.
This morning (2/4/20) MCK reported fiscal 3Q20 adjusted EPS of $3.81, above WR/Consensus EPS of $3.56/$3.50. We note that not all consensus estimates have been updated following MCK’s 1/13/20 $0.40 guidance raise. We had spread the raise relatively evenly between Q3 and Q4 when we updated our model, but it appears the raise was primarily reflective of Q3 upside – by comparison, consensus EPS was $3.39 at year-end. Our estimates are still under review, but this could potentially indicate some conservatism to implied Q4 guidance. Compared to our revised model, upside in Corporate and Europe drove the beat. MCK reiterated fiscal 2020 EPS guide of $14.60-$14.80.
Ahead of MCK’s fiscal Q3 earnings this morning (2/4/20), Change Healthcare (CHNG, not covered) filed an S-4 registration statement that indicates “following the Internal Reorganization, SpinCo will consummate a split-off followed, if necessary, by a spin-off”. We are still reviewing the S-4 and expect MCK will provide additional details today.
We have updated our generic drug market tracking files to reflect December data. Overall, generic sales decreased 2.4% y/y in December. The December decrease was worse than November, driven by pricing – with volumes basically flat in both months. Interestingly, our tracking indicates that the rate of deflation on mature drugs picked up in December – with chain stores appearing to drive the change. While this is somewhat surprising after several months of relative stability, we have not been able to identify any obvious anomalies or extreme outliers within the data. Following November’s data release our analysis suggested modest pressure on margins for independent pharmacy customers in calendar Q4, but inclusive of December the data now suggests independent acquisition costs and chain store acquisition costs declined by comparable amounts. See Slides 3-10 for visuals illustrating the trends discussed below.
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