Trump's Pharma Meeting; WBA/RAD Extension; Earnings Galore

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While wrangling over the Affordable Care Act repeal and replace process continued this week, President Trump turned his attention back to biopharma and the ongoing debate about drug pricing. On Tuesday, he welcomed executives from several large biopharma companies, including Amgen (AMGN), Celgene (CELG), Eli Lilly (LLY), Johnson & Johnson (JNJ), and Merck (MRK), as well as from Pharmaceutical Research and Manufacturers of America (PhRMA). The president reiterated his desire to “get prices down” and his idea to allow Medicare to negotiate prices. To help slow the rate of price increases, the president promised to drastically reduce regulations to enable quicker drug approvals, incentivize biopharma companies to bring workers back to the U.S., and eliminate what he calls “price fixing” to make it easier for smaller companies to compete.
 
During the meeting, PhRMA presented data from a recent Berkeley Research Group study that roughly 47% of the amount spent on prescription medicine in 2015 actually went to the biopharma companies themselves and that they realized 39% of total gross drug spending. The rest went to PBMs, payors, and the government in the form of discounts, rebates, and fees; the president was reportedly interested to learn these figures. According to participants, very little of the meeting was devoted to discussing the role of PBMs in the drug pricing scheme, but Stephen Ubl, PhRMA’s president and CEO, characterized the meeting as “positive and productive” and expressed his commitment to work with the administration to “advance market-based reforms.”
 
It remains unclear precisely what kind of reforms the administration has in mind, but initial Street reaction to the meeting was cautiously optimistic as any legislation could address the entire supply chain (as opposed to only gross pricing) as well as result in the scale-back of regulations that would reduce both the time and cost of bringing drugs to market. It is also unlikely that drug pricing reform occurs before the ACA repeal/replace process is complete.
 
The healthcare world also reacted to President Trump’s executive order blocking people from seven countries from entering the United States, an order that the Association of American Medical Colleges warned could exacerbate the nation’s ongoing physician shortage. The AAMC’s statement noted that roughly 25% of physicians immigrate to the United States via student, exchange-visitor, and employment visas, and that programs like the Conrad 30 J-1 Visa Waiver have been instrumental in directing doctors to underserved communities throughout the country. It is unclear at this point what impact, if any, the executive order will have on foreign physicians’ ability to come to the U.S. to practice, but the issue bears monitoring over the coming weeks and months.
 
Regarding the ACA, the Senate Health Committee on Wednesday held a hearing on “stabilizing the individual health insurance market,” while the House Energy and Commerce Committee on Thursday held a hearing to review a number of bills aimed at replacing the ACA, including one by committee chairman Greg Walden (R-Oregon) that includes a provision covering individuals with pre-existing conditions. Republicans are also considering allowing insurers to raise premiums more for older people than for younger people. GOP leaders are increasingly considering measures to “repair” the ACA rather than repeal/replace, determining that eliminating popular provisions could have negative political ramifications and that it will be easier to fix the law through budget reconciliation than repeal. Meanwhile, managed care executives reportedly testified at a Senate hearing that they would pull back even more from the exchanges unless the subsidies and other features of the ACA remained in place for at least another year.
 
The confirmation process for HHS nominee Tom Price (as well for Treasury Secretary nominee Steve Mnuchin) hit a snag this week when Democrats on the Senate Finance Committee, upset by what they believe were the nominees’ misleading testimony during confirmation hearings, refused to attend the committee vote and asked to bring both nominees back to offer additional testimony. Republicans on the Finance Committee responded by suspending rules requiring that at least one member of the opposing party be present, and they then voted to move the Price and Mnuchin nominations to the full Senate for confirmation votes without Democrats present.

Walgreen Boots Alliance (WBA) on Monday announced amended terms and an extended agreement regarding its proposed merger with Rite Aid (RAD), first announced in October 2015. In response to ongoing antitrust concerns, WBA attempted to close a deal with Fred’s (FRED) to sell 865 stores for $950 million, but the FTC expressed doubts over FRED’s ability to make the purchase. Under the revised terms announced Monday, WBA will now pay $6.50-$7.00/share (down from the $9.00 initially negotiated) and will divest 1,000-1,200 stores (exact price per share will depend on the number of required store divestitures). WBA also lowered the top end of FY2017 EPS guidance to reflect the fact that it no longer expects any material accretion from RAD in 2017, especially with the deal’s end date now extended out to July 31 from January 27.
 
In pharmaceutical news, a federal court on Monday invalidated four patents that Teva (TEVA) holds on its Copaxone 40mg multiple sclerosis drug, which presents roughly 20% of the company’s annual sales. Street consensus heading into the ruling was a low probability of TEVA prevailing, but the company’s 2017 guidance assumed no generic competition in the U.S. This ruling clears the way for two generic launches in February, which the Street estimates could reduce TEVA’s 2017 revenue by at least $1 billion.
 
It was also reported this week that Medtronic (MDT) is exploring the sale of the Covidien Medical Supplies business, which generates roughly $500 million in EBITDA. Divestiture of this business would be dilutive to EPS in the near term, but removing these low-growth products would help boost top- and bottom-line growth. The Street expects MDT to use the proceeds from this sale (possibly $4-5 billion) for share repurchase, thus mitigating some of the EPS dilution.

As we previewed last week, this was an even busier earnings week than last, as several large and systemically important companies across all healthcare sectors reported results. Here are brief takeaways from key results, in chronological order of conference call:
 

• Danaher (DHR): Continued softness in Dental was more than offset by solid performance in Life Sciences and Environmental & Applied Solutions, while Diagnostics was in line; management expects Dental softness to persist in the early part of 2017, but it remains a small percentage of the overall business.
• Zimmer Biomet (ZBH): 4Q results were pre-announced, and while 2017 revenue/EPS guidance bracketed consensus, management indicated revenue growth should accelerate through the year as the company moves past supply chain issues.
• AmeriSource Bergen (ABC): Missed on revenue but beat on EPS in 1Q; management raised FY2017 guidance on WBA’s additional commercial business and branded inflation expected to be a tailwind for the year.
• Aetna (AET): 4Q EPS was a beat, while 2017 revenue/EPS guidance was below the consensus; the Street is looking ahead to 2018 tailwinds from share repurchases and the exit from health exchanges.
• Thermo Fisher (TMO): Margin drove a slight beat for the quarter, while the midpoint of 2017 EPS guidance was slightly ahead of the Street; some analysts viewed this guidance as a sign that end-market pharma demand may be stronger than the Street is forecasting.
• Eli Lilly (LLY): 4Q was mixed, while 2017 EPS guidance was above the Street; the company remains focused on product launches and pipeline, with M&A strategy unchanged.
• HCA (HCA): 4Q results were already pre-announced, but 2017 revenue, same-store sales, EBITDA, and EPS guidance all bracketed or were above consensus, and the company expects to have $2 billion available for repurchases in 2017; impact from ACA repeal/replace remains uncertain.
• Pfizer (PFE): Excluding FX and the divested Hospira infusion system, 4Q revenue and EPS were roughly in line, while 2017 guidance bracketed Street expectations; business development remains a priority, and tax reform/repatriation holiday are not required for M&A.
• Align Technology (ALGN): 4Q case volumes and revenues beat consensus, while 1Q revenue/EPS guidance was set above the Street; management reiterated 20%+ case growth for 2017.
• Illumina (ILMN): 4Q results were pre-announced, and 2017 guidance was reiterated, but 1Q guidance came in below the Street; questions persist about whether the NovaSeq upgrade cycle will be as robust as HiSeq was.
• Anthem (ANTM): 4Q results were pre-announced, and 2017 guidance was slightly above consensus; the extent to which the company’s health exchange footprint will grow during 2017 remains a major uncertainty.
• Baxter (BAX): 4Q results were solid across the board with continued improving operating margin; the Street generally views 2017 guidance as achievable and likely beatable.
• Hologic (HOLX): 1Q results came in higher than expected on solid Diagnostics and GYN Surgical performance, as well as improved operating margin; while the Blood Screening divestiture is viewed as a long-term positive, the near-term loss to EPS weighed a bit on the stock.
• Becton Dickinson (BDX): U.S. Medication Management, O-U.S. Pharmaceutical Systems, and O-U.S. Diagnostic Systems led the strong 1Q top-line performance despite greater-than-expected FX headwinds (now forecast to be 150bps in FY2017 versus 100bps previously); management reiterated constant currency guidance.
• Boston Scientific (BSX): BSX posted a top- and bottom-line beat led by Structural Heart and Pacing, and 2017 guidance came in ahead of the Street; management noted it will enroll additional patients for its ACCELERATE trial, thus pushing out its SCS launch at least another year in the U.S., representing a positive read-through the Nevro (NVRO).
• Merck (MRK): 4Q results were in-line with the Street, while 2017 guidance bracketed consensus; Keytruda missed estimates slightly when accounting for deferred revenue, and the recent approval is included in 2017 guidance.
• Cigna (CI): 4Q EPS topped estimates as lower-than-expected G&A expense offset a higher medical loss ratio; 2017 guidance came in slightly below the Street.
• Amgen (AMGN): 4Q revenue and EPS beat the Street, while 2017 revenue guidance was slightly below and EPS bracketed consensus; the bigger news was AMGN’s announcement that Repatha met primary and secondary endpoints, had no new safety issues, and was non-inferior to placebo on cognitive function.
• Perkin-Elmer (PKI): 4Q revenue and EPS were light of the Street, while 2017 EPS guidance also came in below consensus.

After a hectic two weeks, the earnings calendar, while still busy, is considerably more manageable next week, highlighted by Cardinal Health (CAH), Mallinckrodt (MNK), Gilead (GILD), Allergan (AGN), Teva (TEVA), and Cerner (CERN). Here are brief previews of some of the key earnings reports we will be monitoring:
 

• CTLT (Mon AMC)
  • 2Q consensus revenue/EPS: $471M/$0.26
  • 2017 consensus revenue/EPS: $1.95B/$1.38
  • Looking for commentary on FX trends and broad M&A strategy.
• PINC (Mon AMC)
  • 2Q consensus revenue/EPS: $371M/$0.44
  • 2017 consensus revenue/EPS: $1.51B/$1.85
  • Looking for commentary on hospital purchasing trends and potential ACA repeal impact.
• CAH (Tues BMO)
  • 2Q consensus revenue/EPS: $33.5B/$1.23
  • 2017 consensus revenue/EPS: $131.3B/$5.45
  • Looking for commentary on drug pricing and overall volumes.
• CNC (Tues BMO)
  • 4Q consensus revenue/EPS: $10.95B/$1.11
  • 2017 consensus revenue/EPS $46.5B/$4.68
  • Looking for commentary on capital allocation and M&A plans given recent merger blocks.
• MNK (Tues BMO)
  • 1Q consensus revenue/EPS: $807M/$1.69
  • 2017 consensus revenue/EPS $3.4B/$7.68
  • Looking for commentary on the Questcor/FTC situation and drug pricing.
• GILD (Tues AMC)
  • 4Q consensus revenue/EPS: $2.1B/$2.61
  • 2017 consensus revenue/EPS $27.9B/$10.71
  • Looking for commentary on HCV and overall patent portfolio (particularly TAF).
• HUM (Wed BMO)
  • 4Q consensus revenue/EPS: $13.5B/$2.07
  • 2017 consensus revenue/EPS $55.0B/$10.79
  • Management did not schedule a call given the ongoing AET merger process.
• AGN (Wed BMO)
  • 4Q consensus revenue/EPS: $3.78B/$3.75
  • 2017 consensus revenue/EPS $15.3B/$15.91
  • Looking for color on pipeline, M&A priorities, and drug pricing.
• TEVA (Thurs BMO)
  • 4Q consensus revenue/EPS: $6.3B/$1.36
  • 2017 consensus revenue/EPS $23.7B/$4.81
  • Looking for Copaxone commentary and M&A plans.
• CERN (Thurs AMC)
  • 4Q consensus revenue/EPS: $1.26B/$0.61
  • 2017 consensus revenue/EPS $5.2B/$2.56
  • Looking for commentary on hospital spending trends given ACA uncertainty.
• NUVA (Thurs AMC)
  • 4Q consensus revenue/EPS: Pre-announced results
  • 2017 consensus revenue/EPS $1.07B/$2.07
  • Looking for commentary on operating margins, cervical iGA, and capital allocation strategy.

See the calendar below for the comprehensive earnings schedule for the remainder of February.
 
As always, we welcome all feedback, and have a great weekend!

Best,
Jeremy