On 10/31 SYNH reported 3Q19 adjusted EPS that was modestly above estimates. Revenue and EBITDA were in line with our model, with EPS upside driven by below the line items. Revenue guidance was lowered by <1% with Commercial the culprit but the EBITDA guide was maintained and EPS increased slightly on tax rate. Clinical net book-to-bill was below 1.0x, driven by a large cancelation. The weak bookings performance was allayed slightly by SYNH announcing a new preferred provider relationship with a large pharma client. SYNH underperformed the XLV by 7% on the day of the report and has underperformed by another 2% since.
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On Wednesday 11/6 the Wolfe Healthcare team hosted our first annual conference in NYC. The conference included fireside chats with covered companies across the healthcare spectrum as well as panel discussions with DC experts, not-for-profit insurers and PBM leaders.
This morning (10/31/19) SYNH reported 3Q19 adjusted EPS of $0.87, above Wolfe/Consensus EPS of $0.84/$0.82. Lots of moving parts here, but consolidated rev and EBITDA were in line with our model, with EPS upside driven by below the line items. Rev guide decreases slightly on a weaker Commercial outlook, EBITDA midpoint maintained, EPS guide up slightly on tax rate. Clinical booking trends weakened in Q3 and will be in focus.
Distributors underperformed both the S&P 500 (-1.0%) and XLV (-2.1%). ABC (-0.8%, +1.4% vs. S&P 500, +0.3% vs. XLV) performed best, followed by CAH (-3.2%, -0.9% vs. S&P 500, -2.0% vs. XLV), and MCK (-5.8%, -3.5% vs. S&P 500, -4.7% vs. XLV).
In response to a torrent of news flow, we recently introduced a weekly note discussing key developments in the ongoing opioid litigation. This week’s edition covers numerous pretrial filings, the motion for MDL judge recusal, and other relevant news flow. We also update key dates for the bellwether trials.
Recent opioid litigation news flow has been fairly intense and has inspired us (forced us) to introduce a weekly note discussing key developments, summarizing relevant news coverage, and flagging interesting tidbits that may have otherwise slipped through the cracks.
This morning (09/19/19) House Speaker Nancy Pelosi formally introduced her drug pricing bill via a 3-page summary (see pages 5-7). Similar to the International Pricing Index proposal introduced by the Trump administration, a key feature of Pelosi’s plan is the use of international reference pricing. We are still reviewing the plan but thought it would be helpful to pass along a couple of interesting data points on international drug pricing relative to Medicare Parts B & D. While Pelosi’s plan is somewhat less extreme than the earlier draft, it clearly remains aggressive relative to previous legislative efforts to reduce drug prices and the outlook for support from Congress and the Trump Administration remains uncertain.
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.
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.
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