Healthcare Technology &
Distribution
What We Learned in San Francisco
North America Equity Research
21 January 2020
Last week, we hosted our 38th Annual . Morgan Healthcare Conference. Our
top takeaways from the conference were confidence in the new LabCorp CEO, the
potential for a McKesson exit of Change in the first half of calendar 2020,
continued runway for growth at Teladoc Health with the recent acquisition of
InTouch Health, a favorable setup for CVS Health into 4Q results and initial 2020
guidance, and the ongoing stabilization of the core drug distribution business. In
our view, the presentations and meetings reaffirmed the key themes that have
driven our broader sector and company-specific views, including: consumerism,
specialty, the shift to value-based care and capital deployment. Our covered
companies once again outperformed the market, up % on average during the
conference, vs. a % increase in the S&P 500, marking the fourth consecutive
year of outperformance. Beginning at 9am EST today, the . Morgan
Healthcare team will host a series of calls with takeaways from the conference
(please contact us or your . Morgan sales representative for details).
CVS remains our top pick for 2020, while we also highlight other OW-rated
names (TDOC, LH and MCK). We continue to expect these companies to be
beneficiaries of the key themes we identified for 2020. CVS remains our top
pick, and we continue to believe it is one of the best positioned companies
across our coverage universe over the longer term. While there wasn’t anything
new that came out of the conference, the company continues to execute
successfully on the previously discussed strategies, while we see a favorable set
up into 4Q19 results/initial 2020 guidance. TDOC announced the acquisition of
InTouch Health, raised the 4Q19 and FY19 revenue and visit guidance and
pointed to robust selling activity (we have raised our estimates and price target
to reflect these positive developments). LabCorp spoke to seeking increased
synergies from the combination of the drug development and diagnostics
businesses, expectations for reduced headwinds from managed care contract
shifts, and an upcoming benefit from UnitedHealthcare's preferred lab network.
MCK raised and narrowed the FY20 adjusted EPS guidance and pointed to
improving trends in the business (commentary on branded inflation and generic
deflation was in line with expectations), while again pointing a potential Change
exit in C1H20 (we have raised our estimates and price target on MCK based on
the updated FY20 guidance).
The two large retail pharmacy chains are taking steps to position
themselves for the longer term, although their approaches differ greatly.
The fundamental backdrop remains challenging in the near term, due to
reimbursement pressure and the shift to preferred and narrow networks. While
CVS and Walgreens are taking vastly different approaches (full vertical
integration versus a less capital intensive partnership strategy), efforts to
differentiate the offering (including adding more healthcare services to stores),
drive member engagement and add services and capabilities to improve patients'
overall health will be important to driving share gains going forward, in our
view. We believe that as healthcare continues to evolve to a more consumer-
centric model, and as we see a shift to new value-based contracting models, we
believe the large retail pharmacy chains are well-positioned.
The pharma
distributors pointed to
stabilization of the core
pharma
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Healthcare Technology & Distribution
Lisa C. Gill AC
(1-212) 622-6466
@ Bloomberg JPMA GILL <GO> Michael Minchak, CFA (1-212) 622-6506
@
Anne E. Samuel
(1-212) 622-4163
@
. Morgan Securities LLC
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distribution business, although there was no update on the opioid front.
While it is still early in the year, all three distributors indicated that branded
price inflation appears to be in line with prior expectations at this stage. As it
relates to generics, the companies noted that deflation is generally consistent
with prior expectations and that while the market remains competitive but stable
(no incremental concern around sell-side price competition). Finally, with
regards to opioid litigation, none of the companies had any incremental update
around a potential global settlement. The companies generally noted that the
litigation is complex, and that there are a lot of parties involved, and while they
are hopeful for a resolution, it was unlikely to happen overnight.
We continue to favor Lab Corp in the Clinical Lab space, and feel confident
in new CEO Schechter. Labcorp's new CEO presented at our conference, and
outlined his 5 key priorities for the organization. We believe his background at
Merck positions him well to leverage the combination of the drug development
and diagnostics businesses, which we view as a differentiator for the company.
Looking to next year, the company should see fewer headwinds from managed
care contracts shifts, as CEO Schechter stated that he believes vast majority of
the change from contracts opening happened last year. PAMA headwinds
should remain similar in 2020, and they continue to believe in the industry
consolidation opportunity with expectations for a good pipeline of deals this
year. Finally, we continue like the company’s consumer centric positioning
through their partnership with Walgreens, with a focus on customers highlighted
as one of the 5 key priorities for the company moving forward.
We continue to point to a significant growth opportunity for TDOC. We
view the acquisition of InTouch Health very positively, as it is highly
complementary and makes the company the leading player in providing a single
integrated source of virtual care across care settings. The company also raised
the 4Q19 and FY19 revenue and visit guidance ranges, and highlighted robust
selling momentum heading into 2020 (including the Aetna renewal on favorable
terms). We continue to highlight an impressive outlook, based on runway in the
core telehealth market, TDOC's strong competitive positioning as the only
comprehensive virtual care delivery solution, opportunities around the
expansion of the United relationship, the ongoing rollout of CVS’s telehealth
offering, potential opportunities in the Medicare space, and the further expand
the addressable market by adding new capabilities over time.
Our views on the dental distributors (HSIC and PDCO) are unchanged.
Growth in . dental consumables continues to remain subdued but stable, and
it continues to remain unclear when we could see a rebound. HSIC remains
positive on the outlook, and highlighted its strength in dental specialty products
and value-added services, while again citing confidence in its ability to grow
margins over the longer term. PDCO discussed ongoing progress against the
previously-discussed 3-year strategy, and consistent with the commentary on the
F2Q earnings call last month, pointed to positive momentum as a result of
various initiatives to drive performance.. That said, we continue to have
concerns around margin pressure across the group, and believe both stocks are
expensive, especially relative to longer term projected EPS growth rates.
In Healthcare IT we favor names that are consumer centric, with less
exposure to the mature EMR market. With the EHR market now
experiencing flattish to LSD growth, the dialogue has shifted to other avenues of
growth, and margin capture. Companies highlighted EHR adjacent platforms
growing more rapidly as patient engagement, care coordination, personalized
medicine, and life sciences. The most commonly discussed avenue of focus was
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the patient as a consumer, with many companies investing to align with this
trend. Our two favorite names that are well positioned relative to the consumer
are Phreesia through patient intake/engagement, and HealthEquity through
HSAs, but we also point to Livongo and Progyny as consumer friendly names
that are disrupting their respective industries. Value Based Care was also a
common theme, with mixed commentary around the pace of change. Margin
capture was also a theme, particularly at Cerner, which highlighted its %
target, which it plans to achieve largely through portfolio management (pruning
low margin businesses), facility rationalization, and process improvements. As
companies seek growth outside of the EMR, we expect continued M&A in the
space, with nearly all companies speaking to inorganic growth as a forward
driver.
Takes from our keynote panel with CMS Administrator Seema Verma as it
relates to our coverage universe. We and Gary Taylor hosted a fireside chat
with CMS Administrator Seema Verma. She spoke to the shift to Value Based
Care, price transparency, and interoperability as key initiatives for the
administration, amongst other topics such as drug pricing/rebates and telehealth.
Specifically, on interoperability, CMS is working to incent providers to share
data, while penalizing those that do not. On VBC, the administration is testing
models in both Medicare and Medicaid, working to drive increased provider
adoption while creating tools that do not have the resources to adopt the model.
On price transparency, this aligns with the consumerization of healthcare trend
of putting patients first, while lowering the cost of care with the goal of making
pricing data easily accessible to patients so that they can choose care on the
basis of cost and quality. On telehealth, CMS acknowledges that it is behind the
innovation curve here, but believes that this method of care is important in
providing increased access of care. On the topic of Part D, she noted that the
program has been a great success, and spoke to how rebates keep premiums low,
although there are some perverse incentives in the system which need to be
fixed, while more choices are needed for individuals.
Today, the . Morgan Healthcare team will host a conference call series
starting at 9:00am ET, with a team call providing broad takeaways from the
conference. Following this, there will be three sub-sector calls, which will
provide a deeper dive into individual names and sectors: MedTech & Life
Sciences Tools (Marcus, Peterson) will be at 10:00am ET, Services (Gill,
Taylor) will be at 11:00am ET, and Pharma & Biotech (Schott, Kasimov, Rama,
Fye, Joseph) at 12:00pm ET. For dial-in details, please reach out to us or your
. Morgan sales contact.
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Last week we hosted our 38th Annual Healthcare Conference in San Francisco. We
point to a fair amount of newsflow across our coverage universe relative to prior
years, which included M&A, preannouncements/guidance updates and other corporate
developments. As always, we also saw it as a great opportunity to interact with
management teams and hear about broader market conditions, and company- specific
initiatives and expectations across our coverage universe. All of the companies we
follow attended the conference (with the exception of DPLO, which is in the process
of being acquired by United), and we had CEO participation for all of the companies
that presented. In our view, the presentations and meetings reaffirmed the key themes
that have driven our broader sector and company-specific views, including:
consumerism, specialty, the shift to value-based care and capital deployment. We
note that sentiment across our coverage universe has generally been improving,
despite continued uncertainty around the regulatory environment. In the following
note, we highlight some of the key themes and provide takeaways from each of the
presentations.
Today, the . Morgan Healthcare team will host a conference call series starting at
9:00am ET, with a team call providing broad takeaways from the conference.
Following this, there will be three sub-sector calls, which will provide a deeper dive
into individual names and sectors: MedTech & Life Sciences Tools (Marcus,
Peterson) will be at 10:00am ET, Services (Gill, Taylor) will be at 11:00am ET, and
Pharma & Biotech (Schott, Kasimov, Rama, Fye, Joseph) at 12:00pm ET For dial-in
details, please reach out to us or your . Morgan sales contact.
Summary
The 2020 conference saw a fair amount of incremental newsflow across our coverage
universe, after what was somewhat of a quieter year in 2019. Among the new
developments: Teladoc Health announced the acquisition of InTouch Health and also
raised the 4Q19 and FY19 guidance ranges for revenue and visits; McKesson raised
the FY20 adjusted EPS guidance range; Owens & Minor announced the intention to
sell the Movianto business (European logistics) with proceeds to be used for debt
paydown; Evolent announced expectations for 20% organic growth in 2020 due to
the later Passport RFP decision and HealthEquity provided year end account metrics.
Stock Performance During the JPM Conference
The companies within our coverage universe that participated in the conference this
year were up %, on average, during the conference, which compared to a %
increase in the S&P 500. This marked the fourth consecutive year that our coverage
universe outperformed the S&P 500 during the conference (see Figure 1 below), and
the second largest magnitude of outperformance over that period (399 bps).
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Figure 1: Average Stock Price Performance of Healthcare Technology & Distribution
Covered Companies during the Conference vs. the S&P 500 and the S&P 500 Health
Care Index
%
%
%
%
%
%
2016 2017 2018 2019 2020
Healthcare Technology &
Distribution Coverage Universe
S&P 500 S&P 500 Health Care Index
Source: Bloomberg, . Morgan.
Among the various sub-sectors, the dental distributors and pharma distributors were
the two best performing sub-sectors, up by an average of % and %,
respectively, in 2020, while Clinical Labs and Retail Pharmacy were the two worst
performing subsectors in 2020, although both were up on an absolute basis (see
Table 1 below). Finally, in Figure 2 below, we show the performance by individual
company, with OMI, TDOC and EVH delivering the best performance, and HCAT
and HQY the only two names that saw a decline.
Table 1: Performance by Sub-Sector during the . Morgan Healthcare Conference (2018-2020)
2018 2019 2020
Pharma Distribution % % %
Retail Pharmacy % % %
PBM/Specialty % % N/A
Clinical Lab % % %
Dental Distribution % % %
Healthcare IT % % %
Coverage Universe avg. % % %
S&P 500 % % %
Source: Bloomberg, . Morgan. Note: Pharma Distribution includes ABC, CAH and MCK; Retail Pharmacy includes
CVS, RAD and WBA; PBM/Specialty includes DPLO in 2019 and ESRX and DPLO in 2018; Clinical Lab includes
DGX and LH; Dental Distribution includes HSIC and PDCO; Healthcare IT includes CERN, CHNG, PINC, TDOC,
EVH, HQY, NXGN, HCAT, LVGO, PHR and PGNY in 2020, and CERN, PINC, TDOC, EVH, HQY, and NXGN in
2019 and CERN, PINC, TDOC, ATHN, COTV, EVH, HQY, and NXGN in
2018.
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Figure 2: Stock Price Performance during the 2020 . Morgan Healthcare Conference
OMI, %
TDOC, %
EVH, %
LVGO, %
MCK, %
PDCO, %
RAD, %
PGNY, %
CAH, %
NXGN, %
CVS, %
ABC, %
CHNG, %
HSIC, %
PHR, %
PINC, %
CERN, %
WBA, %
DGX, %
LH, %
HQY, %
HCAT, %
Source: Bloomberg, . Morgan.
Key Themes for 2020
We continue to believe the long term fundamental outlook across the Rx
channel and our positive view on our broader coverage remains intact. The
presentations and meetings at the conference reaffirmed the broader fundamental
themes that have driven our continued overall positive view on the broader sector,
including: underlying utilization (while underpinned by an aging population, we
expect consumerism to be a key driver going forward); expected growth in specialty
(strong top line growth based on new product launches and a robust pipeline, coupled
with payors need to better manage this component of spending); the ongoing shift to
value-based care (tying reimbursement to quality metrics and outcomes); and
opportunities around capital deployment (accretive acquisitions or returning capital to
shareholders via share repurchases or dividends). Below, we provide some
commentary around key themes, our top picks, and highlights across the various
subsectors within our coverage universe. Finally, we recap the takeaways from the
conference presentations and breakout sessions.
Consumerism and empowering the patient was a consistent theme discussed
at the conference. We continue to believe the consumer will be the biggest
disruptor in healthcare, and many companies at the conference discussed how
they are positioning to capture this trend. Companies continue to seek ways to
engage the patient at their preferred point of service in a low cost way. Examples
of this include the Labs shifting patient service centers to retail pharmacy
(Walgreens, Safeway and Walmart), the evolution of the retail pharmacy model
(for example, CVS’s HealthHUBs are focused on better meeting the needs of the
consumer and becoming more of a healthcare destination), increased use of
telemedicine, patient engagement platforms and price transparency.
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The companies across the Rx channel discussed specialty as an opportunity
going forward. We highlight significant new product launches, strong growth of
existing products, as well as a robust pipeline as key top-line drivers over the
coming years. CVS highlighted its leading specialty pharmacy business, which it
noted remains a key growth driver, while WBA indicated that the AllianceRx
Walgreens Prime mail/specialty JV with Prime Therapeutics is doing well. The
drug distributors continue to point to growth around specialty distribution for
physician-administered drugs, opportunities around higher margin manufacturer
services, and also cited the potential tailwind from biosimilars.
While Value Based Care was a consistent theme, the conversation around
the pace of change varied. As we have previously discussed, payors are
gradually shifting away from the traditional fee-for-service system to new value-
based reimbursement models where reimbursement rates are tied to quality
metrics. While the inevitability of change is not disputed in our space,
conversations around the pace were mixed, particularly given expectations for
healthcare to be a central issue of the next election. As it related to the Labs,
UnitedHealthcare's preferred lab network is a good example of industry change,
and they believe that if it is successful, others will follow. In Healthcare IT, the
conversation was mixed around the pace of change (PINC spoke to more
tempered growth vs NXGN which spoke to an acceleration), with many
companies speaking to the digitization of healthcare necessitating data analytics
solutions regardless of FFS or VBC. As it relates to the Rx channel, we believe
PBMs with strong clinical capabilities, tools to manage utilization and ability to
develop innovative contracting structures with manufacturers will benefit, while
retail pharmacies have potential opportunities to benefit from high performance
or quality-based retail pharmacy networks (incremental reimbursement and/or
script volume).
Capital deployment is a key part of the investment thesis across our coverage
universe. Broadly speaking, across our coverage universe, there has been
somewhat less M&A activity relative to the past few years. However, the
companies have shifted capital allocation to share repurchases, or in other cases,
debt paydown as companies delever following larger deals in prior years (.,
CVS and CAH). In the retail pharmacy space, CVS’s primary focus has been on
debt paydown, as the company has suspended share buybacks and will keep the
dividend flat until leverage returns to the low 3x range (2022). While WBA has a
high degree of financial flexibility and as such, we wouldn’t rule out additional
M&A, although the recent focus has been on advancing the partnership strategy
and cost transformation initiative (the company has returned cash to shareholders
via share repo). The pharma distributors have also been somewhat less active on
the M&A front over the past year, although given strong cash flow generation and
relatively conservative balance sheets, where there is flexibility for additional
M&A (CAH has been focused on turning around its Medical business and has
committed to pay down $1B of debt incurred to fund the Patient Recovery
acquisition). On the labs, both spoke to PAMA a consolidation catalyst, albeit
slower than they initially anticipated.
Thoughts on our Top Picks
Following the presentations last week, CVS continues to remain our top pick for
2020, while we also highlight other OW-rated names, including: TDOC, LH and
MCK.
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CVS remains our top pick, as we continue believe it is one of the best
positioned companies across our coverage universe over the longer term.
While there wasn’t anything incrementally new that came out of CVS at the
conference in our view, we remain positive as the company continues to execute
successfully on the previously discussed strategies, including: integration
synergies, enterprise modernization and transformation initiatives. We believe
CVS’s integrated healthcare model (pharmacy, PBM, health plan, specialty, retail
clinics),broad suite of services, strong clinical capabilities and continuity of care
across care settings, position it well to benefit from changing market dynamics
over the longer term, including new reimbursement models (the shift to value-
based care) and the “retailization” of healthcare. The Aetna deal brings a new
integrated model to the marketplace, with the company able to drive lower
overall health costs through data/analytics, more effective patient engagement
and shifting care to lower cost sites. In our view, the next catalyst will be 4Q19
earnings and initial 2020 guidance, which the company will provide on 2/12.
We believe the set-up into the quarter is good, as we don't expect any major
surprises as the company again pointed to the previously discussed preliminary
2020 outlook, while we note that the suspension of the HIF represents an
incremental positive.
We continue to point to a significant growth opportunity for TDOC. We
view the acquisition of InTouch Health very positively, as it is highly
complementary and synergistic to TDOC’s current provider offering, and makes
the company the leading player in providing a single integrated source of virtual
care across care settings. While the company did not provide initial 2020
guidance (as expected), the company did raise the 4Q19 and FY19 revenue and
visit guidance ranges. We also cite favorable commentary around robust selling
momentum heading into 2020. We continue to highlight an impressive outlook
over the near and longer term, based on the significant amount of runway in the
core telehealth market, TDOC's strong competitive positioning as the only
comprehensive virtual care delivery solution, opportunities around the expansion
of the United relationship, the ongoing rollout of CVS’s telehealth offering and
potential opportunities in the Medicare space, as well as the potential to further
expand the addressable market by adding new capabilities over time. We have
raised our estimates to reflect the updated 4Q19 and FY19 revenue and visit
guidance, while our revenue growth estimates for FY20 and FY21 have remained
essentially unchanged (we will wait until the deal close to add in contribution
from InTouch Health to our estimates). We raised our Dec-20 price target to
$112 from $94, which reflects our updated estimates for the legacy TDOC
business, coupled with pro forma revenue, net debt and sharecount projections
for the InTouch Health transaction.
We continue to favor Lab Corp in the Clinical Lab space. We continue to like
the combination with the drug development business at LabCorp, and at the
conference, they highlighted an increasing focus on achieving more synergies
from the combined organization. Looking to next year, we expect fewer
headwinds from managed care contracts shifts, as CEO Schechter stated that he
believes vast majority of the change from contracts opening happened last year.
PAMA headwinds should remain similar in 2020, and they continue to believe in
the industry consolidation opportunity with expectations for a good pipeline of
deals this year. Finally, we continue like the company’s consumer centric
positioning through their partnership with Walgreens.
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MCK remains our favorite name among the three pharma distributors.
While we did not get an announcement from the company around the potential
Change Healthcare exit, the company did raise the FY20 guidance (the first time
the company has raised guidance at the JPM conference), with the company
pointing to growth in the businesses (not due to share repo) and increased
confidence in the outlook following the close of F3Q and early F4Q. We believe
commentary around stability in the business was encouraging, while there were
no surprises around brand inflation or generic deflation (both coming in line with
prior forecasts). Finally, we note that a strong balance sheet and cash flow
provide a high degree of flexibility for accretive capital deployment, with the
company historically being good stewards of capital. We have raised our FY20
adjusted EPS estimate to $, up from $, with our new estimate at the
midpoint of the new guidance range and reflecting % y/y growth. Based on
our updated estimates, our Dec-20 price target moves to $173 from $169.
Broader Sector Commentary
As it relates to retail pharmacy, the two large chains are taking steps to position
themselves for the longer term, although their approaches differ greatly. The
fundamental backdrop remains challenging in the near term, as reimbursement
pressure remains a headwind, while the shift to preferred and narrow networks can
impact script volumes and also add to margin pressure. While CVS and Walgreens
are taking vastly different approaches (full vertical integration versus a less capital
intensive partnership strategy), efforts to differentiate the offering (including adding
more healthcare services to stores), drive member engagement and add services and
capabilities to improve patients' overall health will be important to driving market
share gains going forward, in our view. As we have previously discussed, we believe
that as healthcare continues to evolve to a more consumer-centric model, and as we
see a shift to new value-based contracting models, we believe the large retail
pharmacy chains are well-positioned.
The pharmaceutical distributors pointed to stabilization of the core pharma
distribution business, although there was no update on the opioid front. While it
is still early in the year, all three distributors indicated that branded price inflation
appears to be in line with prior expectations at this stage. Recall that calendar 1Q is
typically the quarter where we see the most price increases, although the companies
again indicated that 95% of brand fees are not contingent on inflation. As it relates to
generics, the companies’ commentary remained consistent, with deflation generally
consistent with prior expectations and that the market remains competitive but stable
(no incremental concern around sell-side price competition). Finally, with regards to
opioid litigation, none of the companies had any incremental update around a
potential global settlement. The companies generally noted that the litigation is
complex, and that there are a lot of parties involved, and while they are hopeful for a
resolution to put the issue behind, it was unlikely to happen overnight.
For the Labs, PAMA should look similar in 2020, but managed care shifts
should moderate, with the PLN an upcoming growth driver. Both LH and DGX
commented on the preferred lab network as a potential growth driver moving
forward. While DGX continues to see opportunity for share capture through
managed care contracts opening exclusivity, LH believes the impact to their business
largely happened in 2019. PAMA will remain a headwind in 2020, similar to 2019,
with litigation around any future impact ongoing. The consumer trend was a top
theme for both companies, as they work to digitize the customer experience, and
move patient service centers to more convenient retail pharmacy locations. Finally,
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M&A remains a continued focus for both companies, however the pace of industry
consolidation is happening much slower than both companies anticipated. They
expect with this the third year of PAMA pressure, that the pipeline will start to
convert.
Our views on the dental distributors (HSIC and PDCO) are unchanged. Growth
in the . dental consumables market continues to remain subdued but stable, and it
continues to remain unclear when we could see a rebound. HSIC remains positive on
the outlook, and highlighted what it views as a leading distribution platform and
strength in dental specialty products and value-added services. Further, management
remains confident in its ability to grow margins. Importantly, the company noted that
it is not seeing anything unusual around price competition in the DSO market or
across its broader business. PDCO pointed to healthy growing end markets and
discussed progress against the previously discussed 3-year strategy, which includes
stabilizing the core (FY19), accelerating performance (FY20) and expanding products
and services (FY21). Consistent with the commentary on its F2Q earnings call last
month, management pointed to positive momentum as a result of various initiatives to
drive performance. That said, we continue to have concerns around potential margin
pressure going forward, and believe both stocks are expensive, especially in relation
to the longer term projected EPS growth rates.
Healthcare IT – Focused on growth outside of the EMR, with the consumer a
recurring theme. With the EHR market now experiencing flattish to LSD growth,
the dialogue has shifted to other avenues of growth, and margin capture. Companies
highlighted EHR adjacent platforms growing more rapidly as patient engagement,
care coordination, personalized medicine, and life sciences. The most commonly
discussed avenue of focus was the patient as a consumer, with many companies
investing to align with this trend. Our two favorite names that are well positioned
relative to the consumer are Phreesia through patient intake/engagement, and
HealthEquity through HSAs, but we also point to Livongo and Progyny as consumer
friendly names that are disrupting their respective industries. Value Based Care was
also a common theme, with mixed commentary around the pace of change. As
companies seek growth outside of the EMR, we expect continued M&A in the space,
with nearly all companies speaking to inorganic growth as a forward driver.
Takeaways from Presentations/Breakouts
Pharmaceutical and Med/Surg Distributors
AmerisourceBergen (ABC/Neutral)
Presenter: Steven Collis (CEO); Jim Cleary (CFO) joined for the breakout session
In our view, there was nothing materially new from the presentation or breakout,
although we note that management continues to remain positive on its competitive
positioning, including within the specialty and commercialization businesses. We
provide some takeaways below.
Brand inflation and generic deflation in line with expectations, The company
noted that branded inflation is coming in the mid-single digit range, consistent
with prior expectations. That said, 95% of the company's gross profit on brands is
from fee for service, with just 5% dependent on price inflation (that has come
down each year). As it relates to generics, the company pointed to stability versus
prior expectations. Recall that management had previously noted that it expected
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generic deflation in the MSD range or slightly higher, and at the end of FY19, had
pointed to some slight moderation. On the sell side, management again noted that
the environment remains competitive but stable. Importantly, management noted
that new generic launches don’t move the needle to the same extent that they had a
decade ago.
There was nothing new as it pertains to a potential global settlement around
opioids. Management noted that the litigation is complex, and there are a lot of
parties that are involved, but that it is hopeful for a resolution, as it looks to put
this issue behind. There was no update around potential timing of a settlement.
That said, despite no timeline, management believes they have greater clarity
now versus 12 months ago.
Management believes it is well positioned in pharma distribution with large
and growing customers across the various verticals. The company is working
through the transition from a period where distributors were heavily dependent on
generics, with specialty now growing in importance. Mix does have an impact on
margins, as faster growth specialty in products can be additive to profit dollars, but
dilutive to margins (for example, ABC is seeing a margin headwind from its
second largest customer bringing on incremental specialty volume this year).
Management does not believe potential regulatory or market driven changes (such
as a shift to net pricing) will have a negative impact over the longer term, and
remains confident that manufacturers recognize the value that distributors add (no
one is making an argument that distributors are over-earning), although there
could be some short term disruption.
Specialty was an area of focus, as the company believes this represents a key
growth driver. Management noted that specialty distribution is the highest
margin area in drug distribution (lots of wraparound services to physicians), is the
fastest growing component of drug spend, and ABC has the highest market share
in this area across the industry. Biosimilars are a small but growing part of the
market at this point, and the company is starting to see some benefit and believes
this should provide an ongoing tailwind going forward.
No changes with respect to PharMEDium. As previously discussed,
PharMEDium is expected to operate at a loss in FY20, although it will not
represent a y/y headwind. Remediation efforts continue, with the company
focused on fixing and optimizing the business (management noted progress is
being made). Once issues are fixed, the company plans to evaluate alternatives
for the business, looking through the lens of what is best for customers and
shareholders. Importantly, management noted that it is still seeing demand from
hospitals and health systems for these services.
Management pointed to good growth in the commercialization businesses
and animal health. This segment drives higher margins versus pharma
distribution (represents 4% of revenue, but nearly 20% of operating income). On
the commercialization side, management called out World Courier, Lash and
Xcenda, among others. In the animal health business, management noted that
MWI is the market leader in that market, and pointed to good growth in FY19,
driven by strength in larger corporate accounts, with companion animal growing
faster than production animal.
With regards to capital deployment, management noted that priorities
remain consistent, and include reinvesting in the business (the highest ROIC
option), strategic acquisitions, share repurchase and a reasonable dividend.
Management noted that the sweet spot for M&A is in the $-$ billion range,
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and that the company has always bought the #1 or #2 player in the industry
(specialty and commercialization business were cited as two potential areas of
interest). While a potential opioid settlement is not likely to change the
company's willingness to do M&A, it could potentially impact the scale of M&A.
The company continues maintain a strong balance sheet which provides a high
degree of flexibility. In the absence of sizeable acquisitions, the company has
returned $ to shareholders in each year over the past two years.
Cardinal Health (CAH/Neutral)
Presenter: Mike Kaufmann (CEO)
In our view, nothing materially new came out of Cardinal’s presentation, breakout
session, or our meeting with the company. Management remains positive on the
stabilization of the business and the strategic initiatives it is undertaking to drive
continued improvement. There was no update to the previously provided guidance,
while the company did reconfirm the previously discussed priorities around capital
deployment. Below we discuss our takeaways.
With regard to opioids, the company noted that it does not have any
incremental update on the settlement or potential timing. The four state AGs
that proposed the previously discussed global settlement continue to work
through the process, trying to sign on additional states, but given the complexity
and number of parties involved, resolution is unlikely to happen overnight.
However, given the settlement offer, the company felt that it was appropriate to
take the accrual for the reserve last quarter. Recall that the company had taken a
$ billion accrual last quarter, which represented its share of the settlement.
Drug pricing is coming in line with expectations thus far in 2020. As it relates
to drug pricing, while we are only 13 days into the year, the company noted that
what it is seeing is in line with expectations it had previously discussed. Note that
the company had previously indicated that it expected brand inflation in the mid-
single-digit range and continued stability as it relates to generics. The company
addressed the potential for a change in gross to net pricing, noting that contracts
have out clauses that would require renegotiations if there was a change in the
WAC price (they have seen success with some manufacturers that have launched
brand equivalents), although this potentially could be messy over the short term if
it was implemented quickly
On the Pharma business, management noted that it continues to see
stabilization in the core distribution business. While the company indicated that
core distribution business may not return to double-digit growth rates from the
past, even with LSD growth in core distribution, contribution from higher
margin/higher growth businesses such as specialty and nuclear can help
supplement growth. Importantly, the company noted that Cardinal and the broader
industry has been doing a lot on the contracting front based on changing market
dynamics (differentiated pricing). According to the company, key drivers of
success going forward include growing the specialty business, investing in higher
margin businesses (., Connected Care, which aims to connect manufacturers,
providers, payors, and patients), maximizing all components of the generics
program, enhancing the core distribution business, and improving efficiency and
the cost position. Nuclear also remains a good opportunity over the next few years
based on new product launches.
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On the Medical business, we note that this remains an execution story,
following challenges in the Patient Recovery and Cordis businesses in recent
years. The company looks to drive benefits from the commercial realignment,
optimize supply chain and operational capabilities, and improve efficiency and the
cost position. The company is wrapping up the process to evaluate the
manufacturing and distribution footprint, including whether it needs to be in 45
counties. Management noted that Cardinal Health at Home had turned the corner
two years ago, and the company has been able to grow the business by double
digits y/y since that point. Interestingly, management noted that while large IDN
customers have had conversations with Amazon, they haven’t seen Amazon make
inroads at this point (although it has forced the distributors to up their game
around customer interface). Finally, management noted that the potential risks
around the medical device tax (permanently repealed, but not a source of upside
as it wasn’t in the company’s guidance) and tariffs have now been removed.
Management again noted that it continues to aggressively look at the cost
structure. The company delivered $133M in savings in FY19 and targets an
additional $130M in FY20 as part of the $500M five-year plan. Management
noted that these will represent permanent cost take-outs and that they wouldn’t
creep back into the business.
The company plans to remain disciplined with respect to capital deployment,
although there was no change to capital deployment priorities. The top three
priorities are 1) investing in the business for future growth (the most important
priority); 2) maintaining appropriate leverage (remaining investment grade); 3)
growing the dividend modestly (the company already has the highest dividend
yield within the group). Beyond those three factors, the company will consider
strategic M&A (there must be a strategic and cultural fit and the target must be
priced appropriately) and also evaluate opportunistic share repurchases.
McKesson (MCK/Overweight)
Presenter: Brian Tyler (CEO); Britt Vitalone (CFO) joined for the breakout session
In our view, the key incremental news was the increase to FY20 guidance, which the
company announced after the market close on 1/13. In the company's presentation,
breakout session and our meetings with the company at the conference, management
highlighted improving performance which began in the back half of last year, which
is driving stability and increased visibility. We note that there was no update on the
Change Healthcare exit (either on timing or whether it would be done via a spin or
split). Below, we highlight some of the takeaways.
The FY20 guidance raise was driven by growth in the businesses (not from
share repo) and reflects themes that the company has been discussing over the
course of the year thus far (the company expects growth in each of the operating
segments). The company noted that as it moved through the end of December
and into early January, their confidence in the outlook increased. That said,
management again noted that it does not provide quarterly guidance, and that
there could potentially be lumpiness in the individual quarters in the second half
of FY20, driven by customer volume, customer mix and product mix (although
they further noted that quarter to quarter volatility balances out over the course of
the year).
Branded inflation and generic deflation are in line with expectations thus far.
With regard to branded price inflation, management noted that based on what
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they have seen thus far in January, mid-single digit price inflation is consistent
with their guidance. Management further noted that 95% of branded
compensation is on a fee for service basis, and the component that is contingent
on price increases is very small, driving less of an impact versus the past. As it
relates to generic deflation side, the company pointed to a more stable
environment overall on the buy side and that the sell side is competitive but
stable, which allows the company to continue to create spread and drive profit
(consistent with prior commentary).
With regard to the VA renewal, the company was very pleased to again
extend that relationship. The company noted that this was a competitive
process, and that the government bid process is unique relative to commercial
relationships, but consistent to other renewals, there are certain return and
working capital thresholds that must be met. Management noted that it was able
to renew the business on terms that they are satisfied with and that there will be
no material impact to 2021 results. While the company has had a few larger
renewals recently, we note that on average, roughly one-third of the company’s
business comes up for renewal each year.
McKesson continues to evaluate the broader portfolio. This ongoing process
led to the recent decision to form a JV with Walgreens for the Germany
wholesale business. Management noted that it was difficult to compete in a
challenging environment as the fourth largest player (the combined entity will be
the largest player in the market and will be better scaled to compete). While the
company would not comment specifically on the potential for additional
divestitures in Europe (., the UK business has underperformed for several
years now due to reimbursement cuts), although management noted that it was
important to take a disciplined and dispassionate look at the overall business as
part of that process.
Specialty was a significant area of focus, as MCK highlighted its
differentiated offering. McKesson does a significant volume in wholesale
distribution (to retail pharmacies and hospitals) and has a strong presence in
specialty distribution to physicians, while the . Oncology business represents
a key source of differentiation for MCK. The company also provides a range of
manufacturer services, which are generally aimed at finding patients, getting
patients on therapy faster, and keeping them on therapy.
No material update on the opioid front. Consistent with the commentary from
the other pharma distributors this week, MCK did not have any update on the
global settlement for opioids. Timing remains unclear given the complexity of the
lawsuit and the number of parties involved. The company would like to put the
issue behind, but noted that they will be responsible stewards of shareholders’
capital as part of that process. The company is prepared to litigate if it comes to
that, although that would likely be a very protracted process that would further
delay the disbursement of settlement funds.
There was no change around priorities for capital deployment. The company
plans to invest in the business, return capital to shareholders and pursue strategic
M&A, all underpinned by a focus on maintaining the investment grade credit
rating. Management noted that potential opioid settlement has not changed the
company's views on capital deployment in the near term.
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Retail Pharmacy
CVS Health (CVS/Overweight)
Presenters: Larry Merlo (CEO), Eva Boratto (CFO) and Karen Lynch (President of
Health Care Benefits) participated in a fireside chat
While there wasn't anything materially new that came out of the company's
presentation, breakout session or our meeting with the company, we note that
management remains very bullish on the outlook, and the company continues to
execute on the initiatives that were laid out at the Investor Day. We provide
takeaways below.
No update to the previously discussed preliminary 2020 outlook. The
company did not provide full 2020 guidance, but pointed to the preliminary
outlook that was provided at the Investor Day last June, which called for 2020
adjusted EPS of at least $, with low-single digit growth off the 2019 baseline
(which excludes prior year's development of health care cost estimates and net
realized capital gains). Recall that the company spoke about various headwinds
and tailwinds for 2020 across the three businesses at the Investor Day, and
nothing has changed, with the exception of the suspension of the HIF. Note that
CVS will provide the full 2020 guidance with 4Q19 results on February 12.
The company remains confident in the outlook for the Retail business despite
leadership transition. Earlier this week, Kevin Hourican, who had served as
President of the Retail/LTC business left CVS to become CEO at Sysco Foods.
However, management noted that the company has a deep and talented bench, and
this shouldn't lead to any disruption on the any of the various initiatives that the
company is working on. John Roberts, who has a lot of retail experience, will
assume responsibility for the Retail/LTC business in the interim, while the
company evaluates both internal and external candidates.
The company continues to execute on longer term plans laid out at the
investor day, and noted that it is meeting or exceeding milestones.
Management highlighted key drivers over the next few years, including: 1)
acquisition synergies ($800M in expected contribution in 2020, up from $400M
in 2019, primarily benefiting the HCB segment); 2) enterprise modernization
(technology enhancements and productivity improvements expected to generate
savings of ~$400-$600M in 2020, which disproportionately impacts the retail
business); and 3) transformation initiatives.
In the company’s prepared remarks, management highlighted key near term
strategic priorities across the business. On the retail side, this included
HealthHubs (CVS expects to have ~50 in 2019, over 600 in 2020 and 1,500 by the
end of 2021). While the company hasn't quantified the performance of HealthHub
stores vs. the rest of the store base, qualitatively, management has noted that these
stores are seeing better script growth, front end sales and margin. On the PBM
side, this included expanding the set of services to all retail locations, such as
Pharmacy Panels (utilizing integrated pharmacy and medical data). On the HCB
business, this included new product and service offerings for Medicare, such as
Low/No Co-Pay at MinuteClinic (2M members at year end) and Healing Better.
Other interesting tidbits from across the three businesses. Within the
Retail/LTC business management again noted that 2020 will see continued
reimbursement pressure, although the company expects a better year from
generics. As it relates to the Omnicare business, the SNF space continues to be
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challenged, and while the company is starting to see some lift from initiatives on
in the ALF market, there is more room to go. Within the PBM, the company
continues to believe in the value the PBM creates (data has proven that out), and
if market or regulatory developments impact one particular profit driver (.,
spread, rebates), the company believes it has flexibility to structure contracts in a
way that can preserve economic neutrality. As previously discussed, it was a
challenging selling season, although driven largely by the loss of a few larger
accounts (including the ongoing Centene roll-off). That said, Caremark will shift
from investment mode on the Anthem implementation to generating profit in
2020, while the rebate guarantee issue will have peaked in 2019, and specialty
continues to represent a key growth driver. Within HCB, management pointed to
above market growth in Medicare Advantage, which was consistent with
previously discussed expectations. While the company had previously talked
about repositioning the PDP business for 2020 to drive improved margins and
attracting members that could be potentially converted to Medicare Advantage,
the company noted that it did experience some contraction, although not as much
as had been anticipated.
We continue to believe CVS is one of the best positioned companies across
our coverage universe over the longer term. We are positive on CVS’s
integrated healthcare model (pharmacy, PBM, health plan, specialty, retail
clinics) and believe the company’s broad suite of services, strong clinical
capabilities and continuity of care across care settings, position it well to benefit
from changing market dynamics over the longer term, including new
reimbursement models (the shift to value-based care) and the “retailization” of
healthcare. The Aetna deal brings a new integrated model to the marketplace,
with the company able to drive lower overall health costs through data/analytics,
more effective patient engagement and shifting care to lower cost sites.
Walgreens Boots Alliance (WBA/Neutral)
Presenters: Alex Gourlay (Co-COO) and James Kehoe (CFO) participated in a
fireside chat; Stefano Pessina (CEO) joined for the breakout session
In our view, there was nothing materially new that came out of either the
presentation or breakout. Management continues to believe the partnership strategy
is the right approach and again pointed to confidence in the ability to meet the full
year outlook despite the sizeable ramp implied in the back half of the year. Below
we discuss some takeaways.
The company believes the partnership strategy is the right approach in the
long run relative to the approach others have taken in the market.
Management noted that they believe in driving value with partners and creating
win-wins. This includes partnerships on the healthcare side, the retail side of the
business, and on the technology side to help drive the digitalization of the
company. While the partnership strategy is cheaper than doing a large
transformational acquisition, management acknowledged that one of the
drawbacks is speed, as it will take time for these initiatives to scale. That said,
the company noted that it expects to have a series of announcements in the next
year that will show how the strategy is coming together.
Management also remains comfortable with the full year guidance, despite
the performance in F1Q. F1Q results did meet internal budget, and although Rx
volume was below expectations (%, vs. the ~4% they target), the company
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pointed to very strong cash flows in the quarter. Management pointed to several
factors that give them confidence in the outlook: 1) a 50 bps top line headwind
from Rite Aid will go away in F2H20; 2) while the company continues to execute
on the cost transformation initiative (expected savings have gone from $ to
$ over three years), overhead savings in FY20 are back half weighted and
are expected to accelerate over the course of the year (15% of the savings fall in
1Q, with over 35% coming in 4Q); and 3) the company expects script volume to
accelerate to the % range (the company has noted that it is doing well with
all payors, with the exception of Caremark/Aetna, and pointed to a very strong
December, with scripts up MSD to HSD driven by timing impacts, flu and unique
programs, and also pointed to a strong pipeline of opportunities for file buys.
The company believes physicians play a key role and discussed highlighted
the partnerships they have in this area. Unlike the company’s closest peer,
Walgreens noted that it does not believe in the nurse practitioner model (a loss
making model for them which drove the decision to shut down their owned retail
clinics). The company noted that the Humana and VillageMD models are
different, as the Humana partnership requires physicians to recruit a panel, which
can take time and pushes out the payback period, while VillageMD already
comes with a full panel, driving s shorter payback period. The company expects
the physician model to ultimately scale to 1,000-2,000 locations, although that
will take time (the company believes they will need 1,000+ locations to make it
significant enough for payors to reward them from an outcomes standpoint).
The company again noted that it was happy with the Prime Therapeutics
renewal. Management again noted that it expects Prime to become stronger as a
result of the recently announced relationship with Express Scripts, which will help
Prime grow, and as a result, should lead to incremental growth for Walgreens over
time. The company noted that the mail/specialty JV (AllianceRx Walgreens
Prime) is doing well, and while the FEP contract will go out to bid, Walgreens
will work with Prime on that renewal, although they believe they have served FEP
well since that contract was implemented
Clinical Labs
LabCorp (LH/Overweight)
Presenters: Adam Schechter (CEO), Glenn Eisenberg (CFO)
New CEO Schechter’s 5 Primary Priorities. CEO Schechter outlined his 5 key
priorities for the organization as new CEO as (1) Win in oncology – where
Labcorp can show the full continuum of the work that they can do. (2) Data
analytics - using AI, and ensuring that they digitalize everything can be
digitalized. This will enable them to use better information to make better
decisions, and enroll trials faster and improve the customer experience. (3)
Ensure they get all of the synergies out of the combined organization. They think
there is still more they can do. (4) Focus on customers – want to ensure a great
experience, whether if in a PSC, or in pharma and biotech, or payers. They
highlighted that they are high quality, low cost and want to really meet the needs
of customers. (5) Put capital behind fastest growing opportunities that they have.
Managed care contract shifts impact going forward and the preferred lab
relationship. LH believes the vast majority of the change from contracts opening
happened last year, and they don’t see anything that would cause non continuous
performance. Looking ahead, they are optimistic about the preferred lab network
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at UnitedHealthcare as an opportunity to drive growth and capture share, as they
are a high quality, low cost provider. They believe that if UNH is successful,
others will likely adopt a similar model.
Consumer strategy and relationship with Walgreens. LH spoke to the
relationship going well with 125 stores up and running today. To understand the
progress, they are measuring volume and tests per session, and looking at stores
to see if customer satisfaction is better than at a PSC. CEO Schechter spoke to
seeing positive momentum in both of those areas. On getting to 600 over time,
they looked at overlap vs the PSCs to come up with that number. If already in a
group practice, they will stay there, but they will monitor standalone PSCs that
are close to Walgreens to see if it makes sense to do consolidation.
Role the labs will play in Value Based Contracting. LabCorp spoke to every
country in the world struggling with healthcare costs, resulting in a need to move
to a value based system. LH believes that they are uniquely qualified to help with
that because they are a high quality, low cost provider. Diagnostics helps with
prevention, and can identify who is most apt to develop a disease. They are able
to see who is most likely to respond to a medication if it is working and what side
effects they might have. Because they are high quality and low cost, they
welcome anything new and innovative for value based care.
Impact of PAMA on 2020 and consolidation opportunity. LH sees the impact
from PAMA in 2020 as similar to 2019. On potential consolidation, they have
have a long list of potential opportunities for these types of acquisitions but are
surprised at how long they are taking. They believe there was still uncertainty
driven by the ongoing litigation which potentially made them more hesitant, but
that moving into year 3 of pricing pressure should result in a good pipeline of
deals coming through
Quest Diagnostics (DGX/Neutral)
Presenters: Steve Rusckowski (CEO), Mark Guinan (CFO).
Becoming a consumer oriented lab. DGX is focused on capturing the consumer
with retail partnerships increasing physical access to the lab. DGX is currently in
select Safeway and Walmart stores, and they see opportunity in WMT to add
incremental basic healthcare services over time. Finally, consumer directed lab
tests remain an opportunity for growth, noting a more consumer oriented
experience (. online platform) should drive growth.
Market share capture driven by value proposition in the marketplace. Within
the past year, Quest has moved in-network at UnitedHealthcare, Anthem Georgia,
and Horizon providing access to incremental lives and opportunity for share
capture. DGX was also recently selected as part of UnitedHealthcare’s preferred
lab network starting July 1. The arrangement will incentivize physicians to move
to preferred labs to reduce out of pocket costs for patients, with a value based
component. Quest believes this will continue to accelerate their share capture and,
they expect other payers to follow suit in creating preferred lab networks.
Fragmented $82B addressable lab market poised for consolidation. Quest
outlined an $82B total US lab market, with physician lab services comprising
$52B and growing 1-2% annually. Within the $28B independent lab market
DGX holds 24% share. DGX outlined 3 drivers of changing market fundamentals
as (1) PAMA, (2) open health plan access, and (3) consumerization
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of healthcare. On consolidation opportunities smaller labs are disproportionately
impacted by Medicare reimbursement cuts, which will serve as a catalyst for
consolidation. As a result, the company sees more than 2% growth coming from
M&A.
Managed care access continues to be a significant revenue opportunity. DGX
highlighted access to 43M incremental lives through expanded access at United
Health, Horizon, and Anthem Georgia. Quantifying the opportunity, DGX sees
these lives as a $4B market opportunity, targeting 25% market share by 2022,
which would equate to $1B in incremental revenue over that time.
Confidence in 3% annual cost saves. DGX sees 3% annual cost savings in the
model through 2022 through driving operational excellence in 4 areas: (1)
Reducing denials and patient concessions, (2) digital experience (3)
standardization & automation and (4) optimization
Dental Distributors
Henry Schein (HSIC/Neutral)
Presenters: Stanley Bergman (CEO) and Steve Paladino (CFO) participated in a
fireside chat
In our view, there was nothing materially new that came out of the company’s
presentation/breakout session, or our meeting with management. The company
continues to remain positive on the outlook, and believes it is positioned well based
on its leading distribution platform and strength in specialty and value-added
services. Below we highlight some takeaways
Management pointed to a stable end market in dental. The . dental
consumables market continues to remain subdued. There has been modest growth
in procedures and spending on brand products has not grown significantly,
although private brand, specialty products and equipment are all growing and
software and technology is growing significantly.
The dental equipment market is growing in the 3% range, and new
innovation could drive an acceleration. That said, equipment growth can be
volatile quarter to quarter, and management noted that they don't have a
significant acceleration in equipment built into the FY20 guidance. The company
noted that basic equipment is solid, imaging units are growing but pricing has
compressed, and digital has seen significant growth. CAD/CAM penetration (DI
and full chairside systems) is in the 20-25% range in the ., although this is
lower than other markets (Germany, for example). Management believes this
will become the standard of care over time.
Growth in dental specialties continues to outpace the overall business. This
includes implants, orthodontic, endodontic and bone regeneration products which
represent ~$700 in revenue or ~10% of total dental sales. These are higher
margin products, although would not quantify the magnitude. The company
highlighted its clear aligner offering, which includes two systems (one for GPs
and one for orthodontists). The company has seen good receptivity for the ortho
product, but acknowledged that it needs to improve the software that supports it
(should be complete in 2002). The company believes the GP version is easy to
use and a good tool for GPs as they compete with DTC offerings.
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DSOs are growing, although the company does not expect a significant shift
over the longer term. “Mega” DSOs (., those with over 100 practices)
represent a relatively small portion of the market (~12-14%), and while they may
continue to grow, HSIC does not expect them to become a majority of the market
over the longer term (a lot of dentists don't want to be part of a DSO and prefer to
run their own practice vs. an employed model). The company noted that it does
have a strong presence in this market. Mid-size groups are growing faster than
the large DSOs, and represent a mid-teens percentage of the overall market (the
company noted that it also does well in that segment). Independent solo
practitioners still have the largest share, but growth has been more modest.
The company noted that it is not seeing anything unusual around price
competition in the DSO market or across its broader business. As it relates to
the shift of the Pacific Dental Services contract, as previously disclosed, this
represented less than % of total sales, and an even smaller portion of profit.
While management believes that this specific contract decision was ultimately
driven largely on price, importantly, they are not seeing a more widespread shift in
the competitive dynamics around pricing (it has always been a competitive
market).
Management remains confident in its ability to grow margins, with a goal of
about 20 bps per year over the longer term. Consistent with prior
commentary, 2020 will be below that target due to stranded costs and IT
investments. Looking over the longer term, the company believes gross margins
will remain flat (compression on core GP product offset by increasing sales of
dental specialty products, including own brands, and value-added services, such
as Henry Schein One offerings, which drive higher margins and create
stickiness). The company expects to gain leverage on the opex line as it reduces
costs through automation and other restructuring initiatives.
While it gets less attention, management is also optimistic around the
outlook for the Medical business, where the company is one of the top two
players in the alternate site market in the . The business is benefiting from
care moving from acute to alternate sites, and management pointed to its strong
position with large customers (., IDNs). The company also pointed to high
service levels/fill rates; broad product categories (med/surg supplies, equipment
and pharmaceuticals as well as software and value-added services).
The company sees its balance sheet strength as a competitive advantage. The
company is under-levered (prefer to maintain cash for dry powder), and although
the company could add more debt to the balance sheet, the preference is to
remain investment grade. Plans for capital deployment remain consistent (pursue
strategic acquisitions and return cash to shareholders via buybacks). The
company would be willing to do larger acquisition if it met strategic and financial
hurdles, although they don’t believe they need to go outside of the core.
Management also highlighted additional opportunity to improve cash flow
(targeting a turn improvement in inventory turns over the next two years).
Patterson Companies (PDCO/Underweight)
Presenter: Mark Walchrik (CEO); Don Zurbay (CFO) joined for the breakout
session
The company's presentation focused on progress the company is making as a part of
the previously discussed 3-year strategy, which included stabilizing the core (FY19),
accelerating performance (FY20) and expanding products and services (FY21). We
highlight key takeaways below.
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The company is at roughly the midpoint of the previously-discussed 3-year
strategy. Recall that in FY19, the key priority was stabilizing the core, with
management having pointed to progress made on various improvement initiatives,
including: improving the customer experience; enhancing sales execution;
stabilizing margins; driving improved cash flow; and strengthening the
management team. In FY20, the company is looking to accelerate performance,
which includes: delivering sales execution; growing value-added services;
improving margins via sourcing, mix management and cost discipline; improving
cash flow and working capital; and delivering revenue and adjusted EPS growth.
Looking ahead to FY21, the company aims to grow targeted segments, introduce
new product categories, commercialize new business services and pursue
innovative business partnerships.
The company highlighted healthy growing end markets driving good long
term fundamentals. The animal health market is being driven by the
humanization of pets, a strong pipeline of new products and strong global
demand for protein. On the dental side, the company pointed to stable growth,
driven in part by the linkage between oral health and overall health, and
innovation driving investments by dental practices.
The company is seeing positive momentum as a result of various initiatives
to drive performance, and pointed to growth in dental segment sales and
companion animal sales. Net working capital is down $100M YTD through the
most recent quarter. Finally, the company raised the adjusted EPS guidance
range for the first time in 6 years in the most recent quarter.
Commentary from the breakout session: the overall dental market is growing
in the LSD range, with consumables on the lower end of that range and equipment
on the higher end; management was pleased with the Pacific Dental Services win
(the second largest DSO in the .) as the company has been making investments
to target that market; management discussed ongoing progress being made around
sales force initiatives and believes there is still room to go; the company believes it
is in the middle innings around initiatives to drive margin expansion (sourcing,
mix, private label, cost savings) and believes there is still room to improve from
here; while the animal health market is evolving with the growth of alternate
channels, management believes the vet is crucial to that ecosystem and that they
are positioned well; PDCO would be willing to consider strategic M&A, but it
would have to be the right strategic fit.
Healthcare IT
Cerner (CERN/Neutral)
Presenters: Brent Shafer (CEO), Marc Naughton (CFO), Don Trigg (EVP, Strategic
Growth)
Progress made in new operating model. CEO Shafer spoke to having made a lot
of progress on the new operating model over the past year, specifically
highlighting the partnership with AWS and transition to SaaS. While 2020 is a
re-basing year due to a portfolio rationalization of low-margin businesses, it sets
the stage to grow revenue from there. CERN continues to target % margins in
2020 as they work to streamline the cost structure. Looking forward, growth will
be driven both organically and strategically with any potential M&A focused on
growth businesses that are profitable. The company plans to provide more
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details around its forward strategy with an updated long-term view at HIMSS in
March.
Strategic growth to achieve scale. CERN highlighted a willingness to partner
and leverage the balance sheet in areas where the company can proactively
achieve scale. On potential acquisitions or partnerships, it will be targeting high
growth in innovation areas such as operational efficiency, provider network
strategy, security, value based care, and the consumer. Acquisition criteria
include ability to scale, barriers to entry, and a strong team.
Government on track as a growth driver. Cerner highlighted its federal
business as the primary driver of growth in the core EHR business, expanding the
company’s TAM substantially. Mgmt spoke to the VA partnership as on track,
with potential over time to expand the revenue opportunity. They are positioned
for wave 1 to begin in March 2020. On the DoD, the second large
implementation recently happened successfully. CERN also highlighted the
AbleVets acquisition providing technical scale & expertise in the federal sector, as
it specializes in cybersecurity, agile engineering, analytics and technology
enablement.
Committed to achieving % operating margins in 4Q20. Cerner remains on
track to achieving its % margin target for 4Q20, and sees opportunity to
further expand beyond that looking forward. Specifically, it spoke to initiatives to
improve margins as (1) portfolio management – creating focus, (2) company
facility rationalization, (3) non-personnel expenses, (4) process improvements /
business simplification, (5) underperforming businesses, (6) management span and
layers
Capital allocation priorities. CERN outlined capital allocation priorities as the
dividend, share repurchase (noting a willingness to take on leverage to
repurchase) with $ remaining on the authorization, and acquisitions to drive
growth.
Change Healthcare (CHNG/Overweight)
Presenter: Neil De Crescenzo (CEO), Fredrik Eliasson (CFO)
Top questions from the breakout: Investor questions in the breakout sessions
were centered around (1) drivers of CHNG’s transition from build phase to
growth phase; (2) synergy recognition, what is left and drivers of 50-75bps
annual margin expansion; (3) digital front door & the consumerization of
healthcare; (4) drivers of recent strength in imaging and RCM; and (5) timing of
McKesson spin/split (awaiting MCK’s timeline).
2020 guidance affirmed. Change affirmed 2020 guidance for solutions revenue
growth of 1-2%, adjusted EBITDA growth of 6-8%, and adjusted net income
growth of 9-11%. Looking to 2021, the company continues to see 4-6% solutions
revenue growth and 6-8% EBITDA growth, consistent with their long term plan
Moving from build phase to growth phase in FY21 = 4-6% revenue growth,
6-8% EBITDA growth and 50-75bps annual margin expansion. CEO De
Crescenzo spoke to being in the second year of a build phase, with the model
poised to inflect in FY21. Specifically, they see revenue growth accelerating to 4-
6% next year driven by key initiatives in imaging and RCM, with 80% of
EBITDA already growing at 5%. Mgmt spoke to seeing traction evidenced by
contract wins on both the imaging and the RCM side that give them confidence in
the acceleration. On the bottom line, $150M of synergies ($~85M remaining) will
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drive margin expansion to 6-8% in FY21, with expansion still possible from there
driven by a leaner cost structure.
Scale unmatched in the industry. Change’s scale is unmatched, touching
roughly one-third of the US population through transacting clinical records as one
of the largest healthcare financial and administrative networks in the US. This
scale and the diversity of products that they provide creates differentiation in the
marketplace. Illustrating their scale, Change outlined 30,000 customers and 700
channel partners, serving over 900,000 providers, 5,500 hospitals and hospital
systems, over 2,000 payers, over 100,000 dentists, over 30,000 pharmacies, and
over 600 labs.
Industry tailwinds present a favorable backdrop. Change outlined several
industry tailwinds that provide a favorable backdrop for growth as increasing
consumerism, growing government influence, consolidation and vertical
integration, new entrants and competitors, system inefficiency, rise of value
based care, increasing regulation and compliance, and emerging technologies.
Evolent Health (EVH/Neutral)
Presenters: Frank Williams (CEO), Nicky McGrane (CFO), Seth Blackley
(President)
Top questions from the breakout: Investor questions in the breakout sessions
were centered around (1) Passport update, (2) components of expanded
addressable market, (3) trends in value based care and any potential election
assumption (they do not anticipate any), (4) competitive landscape unchanged,
and (5) expectations for continued margin expansion moving forward.
Passport RFP decision pushed to April, so EVH sees 20% organic growth in
2020. Evolent closed its acquisition of Passport at the end of 2019. On the latest
on the appeal process, on January 10, the new administration issued a new RFP
with a submission date of February 7, with a final decision on the Medicaid
contract awards currently expected in April 2020, with a contract start date of
January 1, 2021. As a result, Passport’s contract should be extended through the
end of 2020. With Passport no longer a headwind in 2020 (still uncertainty for
2021), the company now sees 20% organic revenue growth in 2020, guiding to a
minimum of $820M in revenue in services. This stands above our model at 10%
organic growth, as we had reduced our numbers when Passport’s contract was not
renewed. Formal 2020 guidance will be provided on the company’s 4Q earnings
call.
$130B Addressable market. Evolent highlighted a significantly larger
addressable market than at its analyst day in May 2019, now at over $130B
($68B at analyst day). They see the market comprised of 3 segments: (1) Total
Cost of Care Management = $60B, (2) Specialty Care Management = $50B, and
(3) Administrative Simplification = $23B. The expansion in the addressable
market was largely driven by the specialty care segment, as they added
commercial and Medicaid vs previously focusing on just Medicare.
2 Primary areas of capital deployment. EVH outlined its capital deployment
strategy as (1) Capability acquisitions looking for a strategic fit, attractive
financial profile and cross sell opportunity. (2) Market leadership and partner
alignment as modest co-investments enable significant long-term services
contracts and capture clinical value.
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Health Catalyst (HCAT/Overweight)
Presenter: Dan Burton (CEO), Patrick Nelli (CFO)
Top questions from the breakout: Investor questions in the breakout sessions
were centered around (1) the competitive environment and how HCAT is
differentiated, (2) Medicity conversion opportunity and pipeline (3) opportunities
to expand the market through adjacencies, (4) recently announced partnerships,
and (5) industry tailwinds and how they position the company for growth.
Comprehensive 3 part solution suite a sticky competitive advantage. HCAT
walked through how its three solutions (DOS, apps, and services) are intertwined,
enabling the company to deliver measurable improvements to its customers.
Specifically, the services component paired with the technology results in a sticky
customer base, with HCAT never having lost an all access customer. On
differentiation vs. its competitors, HCAT believes its scalability and healthcare
specific expertise with a focus on improvements differentiates it from other data
platform vendors. On the data warehousing platform, HCAT’s most common
competitor is home grown solutions, as well as EMR vendors, on the apps, HCAT
competes with point solutions, and on the services side, HCAT competes with
consulting firms. Importantly they believe the combination of all 3 solutions is the
largest differentiator versus their competitors.
Strategic levers to drive long term growth. Health Catalyst outlined expansion
within the existing customer base and growing the overall customer base as ways
to monetize the core. Above that, they see incremental opportunity to drive
growth through additional applications and services, adjacencies (. life sciences,
international), and through partnerships and M&A. HCAT is taking a prudently
cautious approach to incremental verticals given they are outside of the core, with
few initial partnerships not enough to extrapolate in the forecasting yet.
Medicity conversion opportunity inflecting in 2020. Health Catalyst completed
the Medicity acquisition in July 2018, with the initial focus on operational items
that needed to be addressed (. stabilizing the core HIE process). They began
cross sell conversations in summer 2019, with the sales cycle for the core business
generally 12 months.
Attractive operating model with 20%+ revenue growth. Health Catalyst
affirmed its longer term target for sustained 20% top-line growth, high 50s% long
term gross margins (mid 70s tech, mid 30s professional services), and continued
operating expense leverage with a longer-term EBITDA margin goal of 20%+.
Management highlighted a historical track record of >90% recurring revenue and
107% dollar based retention in 2018 which includes both the technology and
services business
HealthEquity (HQY/Overweight)
Presenters: Jon Kessler (CEO), Darcy Mott (CFO), Tyson Murdock (Corporate
Controller)
FY20 Initial Sales results. HQY outlined expectations in FY2020 for $ of
custodial assets reflecting 43% YoY growth and HSAs reflecting 33% YoY
growth (inclusive of WageWorks). At the core, HQY expects that this will equate
to roughly mid-teens organic account growth, consistent with prior years. CEO
Kessler stated that his long term view of the market remains strong, and expects it
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to continue to deliver roughly 3M new HSA accounts annually, and mid-teens
market revenue growth.
2021 yields expected to be %. Looking ahead to next year, while not
providing full guidance, HQY guided to a % yield, which was in line with our
model. The YoY decline in yields is specific to the legacy HQY accounts, with
pressure driven by the recent decline in jumbo CD rates.
Wage Works providing more “at bats” with expectations for the “real
synergies" to drive meaningful improvement in the FY21 sales cycle . CEO
Kesler spoke to the combination with WAGE opening up roughly half the
market, with more “at bats” likely to be achieved through selling bundled
solutions. He expects that HQY should see meaningful improvement in the sales
cycle next year, and that the success of the deal should be judged by that at this
point next year. They view the competitive landscape as banks, retirement,
health plans, and benefits administration, with each of these competitors more
narrowly focused on how HSAs can enhance their existing products, and HQY
now having the most comprehensive product offering.
$50M Synergies split $27M revenue and $23M expenses. HQY spoke to the
previously announced acceleration in the $50M synergy opportunity from the
Wage Works combination, now to be recognized by FY21 end. Specifically, the
$27M of revenue synergies will be driven by non-custodial interchange, and
custodial optimization and $23M of synergies will come from cost saves. CEO
Kessler highlighted that the cost synergies are a net number, with HQY making
investments in the platform and in bringing legacy Wage calls onshore by May.
Livingo (LVGO/Overweight)
Presenter: Glenn Tullman (Chairman and Founder), Zane Burke (CEO), Dr.
Jennifer Schneider (President), Lee Shapiro (CFO)
Top questions from the breakout: Investor questions in the breakout sessions
were centered around (1) Competitive market positioning and industry backdrop,
(2) drivers of rapid growth profile to $1B in revenue and path to profitability in
2021, (3) details of the partnership with Dexcom and how LVGO interacts with
CGMS, (4) client uptake of multiple conditions and whole person approach, and
(5) relationship with channel partners and recent announcement with Higi Smart
Stations.
Long-term targets affirmed, with 2020 Street revenue of $276M blessed.
While the company did not provide color on 2020 guidance, on the 3Q call CFO
Shapiro stated that they are comfortable with the Street consensus estimate for
2020 Revenue of $276 implying 63% YoY growth on 2019 revenue of $-
169M. Long term, the company continues to target $1B of revenue, 72-74%
gross margins, sales and marketing at 24-26% of revenue, R&D at 17-19% of
revenue, G&A at 9-11% of revenue, equating to 20%+ operating margins.
Partnership with Dexcom announced. On Monday morning, LVGO
announced a partnership with Dexcom for members to have the ability to synch
data from their Dexcom G6 Continuous Glucose Monitoring System with the
Livongo platform. This will allow them access to insights and Health Nudges
from Livongo’s platform based on their CGM data. This partnership is a great
opportunity for LVGO to capture more patient data, with mgmt highlighting data
as a way to (1) drive more targeted enrollment (2) drive behavioral change (3)
better personalize and scale coaches (4) removing medication barriers. Note:
Dexcom is covered by JPM Medical Supplies & Devices analyst Robbie Marcus.
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$ diabetes + $ hypertension markets largely untapped and
growing. Livongo outlined its $28B addressable market opportunity in diabetes,
and an $ incremental opportunity from hypertension. The diabetes market is
not only large, but also growing rapidly with annual diabetes spend having grown
33% from 2012 to 2017. At 208,000 members today versus insured people
with diabetes, Livongo has minimally penetrated this vast opportunity. To that
end, in the US, there are >147M people with a chronic condition, and LVGO’s
solution suite covers diabetes, hypertension, weight management, and behavioral
health.
Drivers of rapid revenue growth. LVGO outlined drivers of organic growth as
increasing member enrollment at existing clients, increasing product density, and
expanding the client base. On enrollment, 2018 enrollment was 34% with 47% at
optimized clients, illustrating the opportunity to drive this higher. On product
density, while LVGO is in 4 conditions currently they see opportunity to penetrate
new markets and cross sell additional solutions to existing clients. The company's
long-term revenue target is $1B, and while they plan to add additional conditions
as they grow, the rapid growth in the chronic disease market is enough for them to
achieve their target with their current solution set.
NextGen Healthcare (NXGN/Underweight)
Presenter: Rusty Frantz (CEO), Jamie Arnold (CFO)
FY20 and Long-term guidance (revised on 12/12). NXGN spoke to recently
revised 2020 revenue guidance for $540-550M equating to 2-4% growth, and
EPS of $-$ which includes EPS dilution from two recent acquisitions.
Long term, the company sees revenue growing at an increasing pace from mid to
high single digits by 2023 while earnings are expected to be relatively flat until
FY2023 due to increased investment.
NXGN is seeing more interest from customers in Value Based Care and is
positioning to capture that growth. CEO Frantz spoke to being at an inflection
point in the shift to value based care with 2 sided risk going away. This is
evidenced by client interactions that they have had and from an outside consultant
survey, with the company now investing in R&D to align with this trend and
capture the growth over time.
Positioning to capture the consumer trend. NextGen highlighted its two recent
consumer focused acquisitions. Medfusion provides a patient experience portal,
with over 16 million patients on the platforms serving 41,000 providers and
processing >$1B in payments. The platform contributes messaging through the
portal, online scheduling, online check-in, Medfusion pay, patient satisfaction, and
physician reputation management. OTTO health contributes telehealth on any
device (sent through a link) that is integrated with the EHR. Together with
NextGen mobile, the company sees these three products combined delivering a
robust patient engagement platform, positioning the company to capture the
important trend of increasing consumerization of healthcare
Investing in a new underlying microservices platform to accelerate
innovation and scale. NXGN believes that investing in a modern microservices
platform will enable the company to enhance scalability and ultimately lower the
cost of new development by easing integration of new capabilities with the
platform. As a result of this, the company sees increased R&D spend through
FY23, which will result in flat earnings growth over that period despite
expectations for a revenue acceleration to MSD-HSD.
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Expected forward segment growth & margin trends. On drivers of the model
going forward, they see subscription services as the long term growth driver
based on new offerings, a low single decline in support and maintenance,
consistent mid-single digit growth in managed services, and a steady modest
increase in EDI and data services. On expenses, gross margins should moderate
slightly due to the shift to subscription and services, with R&D to increase as a
percentage of revenue driven by investments in growth, eventually moderating,
and SG&A should start to moderate as a % of revenue into FY21 and beyond.
Phreesia (PHR/Overweight)
Presenter: Chaim Indig (CEO and Founder), Tom Altier (CFO)
Top questions from the breakout. Investor questions in the breakout sessions
were centered around (1) customer ROI and rapid payback period, (2)
competitive landscape and how PHR is differentiated , (3) partnerships and how
they provide a hunting license for growth, (4) recent life sciences strength with
continued target for flattish growth, and (5) cross sell/upsell and go to market
strategy.
2019 Guidance reiterated. Phreesia reiterated 2020 guidance which was raised
on the December earnings call for revenue of $ to $ equating to
% growth, and for positive EBITDA.
Room to grow in a $7B addressable market. Phreesia is minimally penetrated
relative to its $7B addressable market, with substantial room to grow. The
addressable market can be broken into 3 components based on the company’s
revenue stream. Subscription-based revenue represents a $ market, driven
by 890K addressable providers with potential annual subscription revenue of
$4,800 per provider per year. Payment processing represents an estimated $
TAM through $91B of out -of-pocket payments in the US, with ~80% of
transactions made on cards. Finally, in Life Sciences, the direct-to-consumer
point-of-care market spend is roughly $750M. Worth noting, this addressable
market does not include the acute care space, which represents a potential growth
opportunity in the future.
Growth algorithm and drivers. Phreesia expects to grow its top line at ~20%
annually driven by mid-single digit client growth and revenue per provider
driving the delta to 20%. PHR highlighted its recurring revenue stream and 90%
client retention as providing a good deal of visibility. Mgmt outlined the 5
primary growth drivers as (1) land new clients, (2) expand the footprint with
existing clients, (3) cross sell applications to existing clients, (4) expand margin
through scale, and (5) partnerships and acquisitions. On the bottom line, scale
driven largely by G&A should drive EBITDA margin expansion.
Industry tailwinds support growth opportunity. Phreesia outlined 5 industry
tailwinds as supportive of their growth as (1) wasteful spending - $300B of
administrative waste in the industry currently, (2) increasing patient responsibility
– an estimated $586B out-of-pocket spend by 2027, (3) increasing consumerism -
demand for higher quality care, cost transparency, and convenience, (4) shift to
value based care models, and (5) focus on personalized healthcare solutions.
Premier, Inc. (PINC/Neutral)
Presenters: Susan DeVore (CEO), Craig McKasson (CFO), Mike Alkire (COO)
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Utilization improving, but not enough to call it a trend yet In the breakout
session, PINC spoke to an improvement in the utilization environment last
quarter, and a continuation of that trend into this quarter. While they are
encouraged by the lift (first time in 5-6 quarters), they do not believe it is enough
to call a trend at this point, and they continue to believe that they will see
pressure on inpatient utilization over time.
Positioned to capture emerging healthcare trends. CEO DeVore outlined 5
emerging trends in healthcare that will shape the business as (1) Ongoing shift to
value-based care and two-sided risk –acknowledging political uncertainty has
resulted in more stalled growth. (2) Continued focus on creating healthier
pharmaceutical markets – solving for drug shortages citing the recent ProvideGx
acquisition. (3) Increasing focus on the overall cost management of healthcare –
including labor, supply chain, safety, and population health, (4) Employers taking
a more active role and contracting directly with providers to drive out variation in
care, (5) Turning data into actionable insights at the point of care.
Operational initiatives to support strategies. Premier highlighted four
operational initiatives to support strategies including (1) recently launched
Contigo Health, a network of healthcare providers collaborating with employers
and their health plans. The aim is to help employer clients deliver the best care
possible for their employees, with a focus on driving out variation in care
delivery. (2) Stanson Health which puts clinical decision support analytics
directly into the workflow. (3) Stockd an ecommerce platform for alternative
sites. (4) Medpricer which provides enhanced capabilities in purchase services.
Expanding capabilities in supply chain services points to wider market
opportunity. Premier spoke to $61B of spend today through the GPO, with
opportunity to expand the portfolio and market opportunity to physician
preference, regionally focused contracts, specialty areas, and purchased services.
Capital Allocation Priorities. PINC noted significant cash at its disposal and
strong FCF generation with FCF at 61% of EBITDA in FY19. The company
pointed to its flexibility with virtually no debt on the balance sheet. Mgmt
outlined a balance of cash priorities between (1) continued growth and expansion
(investment to support organic growth and M&A to drive scale), (2) maintaining
a flexible balance sheet and (3) return of capital to stockholders.
Progyny (PGNY/Overweight)
Presenter: David Schlanger (CEO), Peter Anevski (CFO and COO)
Top questions from the breakout: Investor questions in the breakout sessions
were centered around (1) the competitive environment and how PGNY is
differentiated, (2) revenue growth drivers and utilization (3) opportunity to grow
through expansion into adjacent benefits and new types of customers, (4) industry
tailwinds and how they position the company for growth, and (5) how PGNY
delivers savings to their clients as well as improved outcomes.
2019 Guidance affirmed. Progyny affirmed 2019 guidance for revenue of
$ - $ million equating to % growth at the midpoint, and EBITDA
of $.
PGNY poised to capture share in growing fertility market. In the
presentation, PGNY highlighted that infertility affects a large portion of the
population with one in eight couples suffering from infertility according to the
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CDC. Progyny identifies its TAM as ~$12B, with roughly $ currently spent
on fertility (including medications); however, it believes the market is roughly
double this size as only 50% of those suffering from infertility seek treatment due
to lack of coverage. There are two primary drivers of % market growth: (1)
Demographics changes such as family planning at later stages in life and (2)
nontraditional paths to parenthood.
How PGNY is differentiated vs. competitors. Progyny outlined four key ways
that they are differentiated vs. traditional fertility benefits providers as (1) a
benefits plan design focused on outcomes, (2) high-touch concierge-style member
experience resulting in a net promoter score of +71, (3) a high-quality physician
network, and (4) integration of the pharmacy and medical benefit. Mgmt
highlighted how data informs all of those key areas of differentiation to drive
better outcomes and a better member experience. Progyny has been able to
demonstrate improved outcomes within its network vs. the national average with a
16% higher pregnancy rate per transfer, a 26% improvement in live birth rate, a
45% reduction in miscarriage rate, and a 78% reduction in multiple births. They
view barriers to entry as a network that is not easily duplicated, a 5 year head start
on systems, and integration with the carriers, which VC backed startups have not
yet been able to achieve.
Delivering savings to their customers. PGNY spoke to doing complex and
detailed financial analysis for each customer to show them what they would save
with the plan. While each customer varies, they find their solution drives ~20-
30% savings to their clients. PGNY highlighted that the industry spends $
due to high risk pregnancies and preterm births with 20% of multiple births due to
IVF. On indirect expenses, the industry loses $ from lost productivity due to
higher absenteeism, depression/anxiety, and lower employee retention.
Drivers of rapid top line growth. PGNY has been able to deliver a 118%
revenue CAGR over the past 3 years, with 2019 guidance implying %
growth at the midpoint of the range. Growth in the future should come from new
clients, expansion at existing clients as they grow, upsell of existing services as
they opt for incremental coverage (smart cycles, egg freezing), new types of
clients, and through new services and adjacencies.
Teladoc (TDOC/Overweight)
Presenter: Jason Gorevic (CEO); Mala Murthy (CFO) joined for the breakout
session
While the InTouch Health acquisition was the key piece of incremental news, the
company also updated the revenue and visit guidance for 4Q and FY19 with the new
ranges coming in above the upper end of the prior ranges (as expected, the company
will provide initial 2020 guidance with F4Q results). In addition, we believe the
incremental color around the selling season (including the Aetna renewal) and other
key growth opportunities will also be well received. We reiterate our OW rating.
We view the announced acquisition of InTouch Health very positively.
Yesterday morning, TDOC announced that it has entered into a definitive
agreement to acquire InTouch Health for
