Last night (01/21/20) CNC announced it has received antitrust clearance from the DOJ to acquire WCG, the last piece of regulatory requirement under the merger agreement. The companies now expect to close the deal and related divestitures on Thursday, January 23rd. In terms of post deal catalysts, look for any update around accretion targets at CNC’s 4Q19 EPS on February 4th vs. I-day guide of breakeven in Year 1 turning to / MSD-to-HSD accretive in Year 2 last Dec. Importantly this assumes WCG will deliver only S-4 projections (9 months old), which suggests potential for upside to accretion given WCG has been on track to outperform 2019 S-4 #s. Once mgmt. factors in revised WCG projections from S-4, we see potential upside to #s coming from 3 buckets: 1) better Med Adv margins, 2) AET PDP’s strong performance and membership retention, and 3) savings from new PBM contract. On the PBM topic we would expect an update here w/ CNC 4Q19 results, with key discussion including whether WCG stayed w/ CVS or moved (we expect they stayed) and if they indeed did stay w/ CVS whether there will be benefits to pricing beginning in 2020 or will those better drug costs come in 2021 post current contract expiration at YE20. Overall we estimate these 3 upside drivers could add $0.20-$0.30 or 3-5% accretion to Year 2 / 2021 EPS, potentially moving our current post-deal est. of $5.70 (7.0% accretion) closer to $6.00. See Exhibit 1 on Page 2 for more details around our calculation. Also we note current 2021 Consenus EPS of $5.45 does not appear to reflect deal accretion and will very likely be revised upwards after yesterday’s announcement. We recently upgraded CNC to Outperform coming into the new year and see it as the most interesting new money idea in our coverage universe. Lastly, as a reminder CNC will get another shot at retaining LA post Friday announcement of RFP rebid and the TX STAR / CHIP awards are expected to come out this month. CNC serves ~810k members under this contract and generates ~$2.2B in premiums, which at 2.5% would be worth 1.5-2.0% of our 2021 pro-forma est at $5.70.
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Biden’s national polling aggregate is basically unchanged since our last update and he remains the favorite both in polling and RCP betting average at 35% odds to win vs. Sanders at 31%. From here it is clear that Iowa will be a significant catalyst. From a polling perspective, as we discuss below, after last weekend saw Sanders with strong polling results in IA this weekend Biden bounced back leading in 2 separate IA polls. With no less an authority than Nate Silver’s 538 Politics indicating that a IA win would catapult Sanders / Warren in front of the Dem field from a probability perspective and a Biden win here could make him a near lock to win (again more below), we see Feb 3 as a meaningful marker for the HC sector in general and MCOs in particular as the fundamental backdrop remains fairly benign in the NT after a solid UNH print last week and shaping up strongly for 2021 on the back of accelerating earnings growth post HIF repeal as outlined in our 2020 Outlook.
According to Politico, the Supreme Court has rejected Democrats’ request submitted earlier this month to fast track the ongoing ACA lawsuit to the high court before election. For background, recall the 5th Circuit Court of Appeals ruled on Dec 18th, 2019 that the individual mandate was unconstitutional, but sent back the case to the lower district court to assess how much the rest of the law can stand. If correct, the process of briefing, argument, and ruling will restart at the lower court which took 291 days from the start to finish when the lawsuit was first filed. From there the Court of Appeals will have to rule again which will likely delay any Supreme Court decision until 2021 / 2022. See Exhibits 1 and 2 for more on timeline of the case & plans’ exposure to the Medicaid expansion and exchange earnings by MCO with MOH/CNC/ANTM most impacted.
According to the latest flu report (Week 2, ending Jan 11) from the Centers for Disease Control and Prevention, nationwide flu activity continues to moderate in recent weeks vs. the trend in December – see exhibit 1 on page 2. Outpatient visits for influenza-like illness was 4.7% of total patient visits during Week 2 vs. 5.7% in Week 1 (ending Jan 4) and 6.9% in Week 52 (Dec 28). The CDC noted that while flu activity appears to be declining “it is too early to know whether the season has peaked or if flu activity will increase again”. In addition, as we highlighted in our recent work (slides / webcast), flu-associated hospitalization rate remains at a low level – see exhibit 4 on page 3.
In the latest published Medicaid & CHIP enrollment report (October 2019), U.S. Medicaid enrollment in September was revised upwards and now reflects stable enrollment month to month vs. the down 0.7% seen in preliminary data from last month’s report. This is the third straight month of stable enrollment for Medicaid post revisions – again indicative that we may have seen the worst in terms of enrollment and risk pool deterioration. As we pointed out in our previous note, preliminary #s from CMS seem to have an initial downward bias – which has been the case for the past 4 months. Therefore we think it makes sense to focus on revision trends – see Exhibit 1 on Page 2 – rather than the preliminary October reading of down 0.7% m/m (more below) as an indicator of Medicaid enrollment and eligibility re-verification impact.
The latest Monmouth University Poll released today (1/13/20) shows Biden taking the lead from Pete Buttigieg who led during the most recent poll in early November, followed by Sanders who continues to show strong momentum in IA moving up to #2 from #4 previously. Biden took the lead with 24% from previous 19% with Sanders moving to #2 at 18% from previous 13%, while Buttigieg dropping to 17% vs. previous 22%, and finally Warren dropping to #4 at 15% vs. previous 18%. Despite Biden’s lead in this poll being encouraging, it is clear that the poll reiterates Sanders momentum on the heels of the Des Moines Register Polling from Friday (more below) with Sanders in the lead and Biden 4th, weighing on MCOs today with the sector under-performing the S&P 500 by 3-4%.
Sysco (not covered) announced today (1/13/20) that Kevin Hourican, EVP of CVS Health and President of CVS Pharmacy, is elected as the co.’s new president and chief executive officer starting on Feb 1, 2020. According to CVS’s website, Mr. Hourican was “overseeing all aspects of the company’s retail business, including its 9,900 retail stores, as well as merchandising, marketing, supply chain, real estate, front store operations, pharmacy growth, pharmacy clinical care and pharmacy operations.” In addition, Mr. Hourican was leading the transformation efforts of CVS Pharmacy and oversaw development of the HealthHUB store format. We believe today’s announcement will raise some questions on progress / outlook of the co.’s pharmacy business, especially following the weak quarterly results posted by its largest competitor, WBA.
Late day on Friday (1/10/20) the Des Moines Register issued its updated poll on the Iowa Democratic Caucus, with Bernie Sanders taking the lead from Pete Buttigieg who led during the most recent poll in late November. While Sanders took the lead, the polling remains extremely tight with Sanders moving to 20% from previous 15%, with Warren remaining #2 at 17% vs. previous 16%, Buttigieg dropping to 16% vs. previous 25% and finally Biden at 15% vs. previous 15%. Given the historical importance of early state primaries we expect there will be some heightened concern around potential increased Sanders momentum. That said, it is clear that Biden remains the front runner and our conversations with investors indicate an expectation that Sander’s will likely face an uphill battle post IA/NH/NV primaries.
Earlier this afternoon (1/6/20) the Supreme Court requested Republican-led states challenging the ACA to respond to a petition submitted by Dem-led defendants last Friday to fast track the ongoing ACA lawsuit to the high court. Attorneys from the red states will have until this coming Friday, Jan 10th, to respond. For background, recall the 5th Circuit Court of Appeals ruled on Dec 18th, 2019 that the individual mandate was unconstitutional, but sent back the case to the lower district court to assess how much the rest of the law can stand. Contending that the ruling by the Appeals court could delay a final resolution of the case much longer, attorneys from Dem-led states decided to call on the Supreme Court to take up the case “for the sake saving lives and ending uncertainty in our health care system”, said CA Attorney General Xavier Becerra who is heading the legal defense. We note only 4 out of 9 votes are need for the Supreme Court to hear the case.
We see a continued reasonable operating environment for managed care heading into 2020 featuring a strong Medicare Advantage growth outlook, signs of stabilization in Medicaid enrollment / risk pool pressure and benign commercial cost trends per our proprietary NFP channel checks all indicating reasonable visibility around 2020 earnings performance.