Since entering the race on April 25, Biden has rapidly solidified his status as the front-runner for the 2020 Democratic Presidential nomination, with a lead of 16.8 points (vs. 18.4p 1-week ago / 17p 2-weeks ago) according to the RCP’s national polls – see slide 3. There was no noticeable change in the polls over the past two weeks with Sanders remaining a distant second and Warren / Harris sitting in third / fourth. While the polls have been relatively stable, look for potential volatility into the first Democratic debates scheduled for June 26-27 and July 30-31, respectively – we discuss the change in the debate rules this year on page 2.
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Wolfe Research Senior Healthcare Analyst, Justin Lake, hosted a webcast to discuss the Democratic primary landscape, what the path to clarity is, what it will take to get material healthcare reform passed, thoughts on impact to economics and stocks from various outcomes.
We are revising our estimates for MCO / Drug Retail coverage post 1Q19 results. We are also updating our price targets across our coverage universe to reflect 1) revised earnings est laid out in this note and 2) an incremental group discount vs. S&P given the ongoing political uncertainties. See table below, links to all updated models and new PT build-up on page 2 for further details. We continue to rate the MCO group Market Perform with top picks remaining ANTM & UNH.
WBA reported Q2 adj. EPS of $1.64, vs. WR/Consensus of $1.75/$1.72 with the miss primarily driven by the weakness in the US Retail Pharmacy business. Adj. op profit of $1,935M (down 10.5% y/y) was meaningfully below WR/Cons of $2,112M/$2,082M, with US Retail ($1,455M vs. WR/Cons of $1,643M/$1,659M, down ~12% y/y) well below and Pharma Wholesale ($225M vs. WR/Cons of $231M/$238M, down 2.6% y/y) modestly below est. partially offset by better results in International Retail ($256M vs. WR/Consensus of $237M/$204M, -8.6% y/y). WBA lowered FY19 EPS growth guidance to flat y/y from 7%-12% growth, citing reimbursement pressure, lower generic deflation, as well as continued market challenges in the US and UK. Assuming share repurchase benefit of +5% holds, new guide implies 2H19 NI to be down -6.5% y/y. Meanwhile, the co. provided LT EPS growth target of mid-to-high single-digit growth vs. low-double digit growth target communicated a few years back.
CNC announced (press release, infographic also on page 4 / has summary details, investor presentation) the acquisition of WCG for $305.39 per share, a 32.1% premium to yesterday’s close and ~21.0% premium to 30-day VWAP. WCG shareholders will get 3.38 shares of CNC and $120 in cash, with transaction close expected 1H2020. Expected synergies are $500M, and deal is expected to be slightly dilutive year one and MSD accretive year two. See more key details below. We will be hosting a webcast post-deal call around ~9:15AM – invite should be in your inbox soon.
We are revising our estimates for CNC / MOH / HUM / WCG post 4Q18 results. We are also updating our price targets across our MCO / Drug Retail coverage universe to reflect 1) our revised earnings estimates laid out in this note and 2) the current S&P 500 market multiple of ~16x NTM earnings (up from previous 15x coming into 2019) given that our valuation methodology is based on relative P/E. See table below, links to all updated models and new PT build-up on page 2 for further details.
Part 2 of the 2020 Medicare Advantage Advance Notice will be published sometime later this week, likely either Thursday 1/31 or Friday 2/1 (was released on Weds 2/1/17 and Thurs 2/1/18 despite CMS stating a 1/31 target last year). Based on “known” rate components we est. plan reimbursement should increase by ~2.9% ex-HIF – see Exhibit 2 on page 3 for details. Final rates are expected on 4/1/19 and rates have historically been more likely to improve than not vs. Adv Notice.
CVS noted lower brand inflation as a 2019 headwind at a recent investor conf (see our notes here and here) – inline with our concerns highlighted last year (see our PBM initiation) on rebate guarantee exposure. This follows on 3Q PBM guide down driven by higher guarantee payouts for 2018. From here questions naturally focus upon sizing the headwind for next year and read-thru to PBM peers.
We Remain Constructive on MCOs but See Risk/Reward More Balanced. MCOs have a strong fundamental backdrop and several tailwinds (HIF holiday / investment income) that support unique earnings visibility into 2019. That said, given current relative valuations appear to reflect much of this 2019 MCO earnings momentum we take a more measured view on the group as there are a number of potential factors that could weigh on sentiment and operating performance going into 2020. See PDF page 11 below for more details on these potential factors and please join our webcast this morning at 11am ET (click here to register) where we will discuss our views and answer questions.
WBA reported Q1 adj. EPS of $1.46, vs. WR/Consensus of $1.42/$1.43 with upside driven by $23m of other income and a lower tax rate. Adj. op profit of $1,732M (down 4.3% y/y) was below WR/Cons of $1,778M/$1,799M, with International Retail ($132M vs. WR/Cons of $209M/$214M, down 37% y/y) well below and Pharma Wholesale ($220M vs. WR/Cons of $233M/$239M, down 1.8% y/y) modestly below est. offset by solid results in US retail ($1,379M vs. WR/Consensus of $1,335M/$1,345M, flat y/y), potentially a positive read-thru for CVS. Note that the co. expected ~21-22% of FY19 earnings ($1.38-$1.44 at the mid-point of guidance) in 1Q and management reiterated EPS guidance of 7%-12% growth for FY19. WBA repurchased $912M of shares during 1Q, which leaves ~$2.1B for remainder of the year (~$3B target). Look for focus on outperformance in U.S. and International weakness on the call and please see our recent initiation for more on our views around WBA.
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