1、North America Equity Research14 January 2019 Healthcare Technology&DistributionWhat We Learned in San FranciscoHealthcare Technology&DistributionLisa C.Gill AC(1-212)622-Bloomberg JPMA GILL Michael Minchak,CFA(1-212)622-Anne E.Samuel(1-212)622-J.P.Morgan Securities LLCSee page 26 for analyst certifi
2、cation and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only
3、a single factor in making their investment Last week,we hosted our 37th Annual J.P.Morgan Healthcare Conference.While there was not a significant amount of news flow across our group,as always,we saw it as a great opportunity to interact with management teams and hear about broader market conditions
4、,as well as company-specific initiatives and expectations.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.While sentiment across th
5、e majority of our coverage universe remains somewhat weaker,our covered companies were up 3.6%on average,during the conference,vs.a 2.6%increase in the S&P 500,marking the third consecutive year of outperformance.Beginning at 9am EST today,the J.P.Morgan Healthcare team will host a series of calls w
6、ith takeaways from the conference(please contact us or your J.P.Morgan sales representative for details).CVS remains our top pick for 2019,while we also highlight other OW-rated names(TDOC,LH,MCK,WBA and DPLO).We continue to expect these companies to be beneficiaries of the key themes we identified
7、for 2019.CVS remains our top pick,and while the headwinds/tailwinds for 2019 weighed more heavily towards headwinds,(see our note published Friday with our updated estimates)we believe in the strategy and continue to believe the company is one of the best positioned companies in our coverage univers
8、e over the longer term.TDOC provided bullish commentary around the selling season and the United Healthcare relationship.LabCorp spoke to a challenging 2019 given managed care&PAMA headwinds,but sees these mitigating somewhat in 2020 and highlighted the growing importance of the consumer and remains
9、 very positive on opportunities for Covance.Commentary on branded price increases was in line with expectations,easing an ongoing concern for MCK and the drug distributors.While there was nothing new from WBA,the company remains optimistic around partnerships and the cost-cutting program.Finally,on
10、DPLO,while the preliminary FY19 guidance was disappointing,we view the issues on the PBM side as fixable and believe valuation is attractive.We believe the two large retail pharmacy chains are taking important steps to position themselves for the longer term.Reimbursement pressure continues to remai
11、n a headwind to margins,while the shift to preferred and narrownetworks can drive script volume but also add to margin pressure.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 mode
12、ls,we believe the largest players are very well-positioned based on investments they have made on the healthcare side of their business.While CVS and Walgreens are taking different approaches(full vertical integration vs.a partnership model),efforts to differentiate the offering,drive member engagem
13、ent and add services and capabilities to improve patients overall health will be important to driving market share gains going forward,in our view.For the pharma distributors,the main focus was on branded price inflation,as well as generic deflation and the opioid issue.While still early in the year
14、,all three companies indicated that branded price inflation appears to be in line 2North America Equity Research14 January 2019Lisa C.Gill(1-212)622- with prior expectations at this stage,and again reiterated that 95%of brand fees are not contingent on inflation.Generic deflation commentary remained
15、 consistent(while the market remains competitive,pricing appears to be stabilizing).Finally,with regard to opioids,given the ruling that the NY opioid tax is unconstitutional,the companies pointed to a potential reversal of expenses related to this tax.The companies are evaluating options regarding
16、the current litigation,but it remains too early to estimate the scope of a potential settlement.We continue to favor Lab Corp in the Clinical Lab space.We see LH as well positioned as the company increasingly focuses on the patient as a consumer,highlighting its expanded partnership with Walgreens a
17、nd Pixel self-collection device at the conference.We continue to like LabCorps more diversified revenue stream and while near-term pressures remain(PAMA,managed care contract shifts),we believe the company is well positioned to capture the shift to consumerism going forward.On Covance,management rem
18、ains confident in mid to high single digit growth,driven by an improving regulatory environment,strong therapeutic growth,and significant innovation in the emerging biotech segment.We continue to like TDOC in the small/mid cap space.While the company did not provide initial 2019 guidance,we point to
19、 favorable commentary around a strong selling season and an expansion of the relationship with UnitedHealth Group.We continue to point to an impressive outlook over the near and longer term,based on the significant amount of runway in the core telehealth market,TDOCs strong competitive positioning a
20、s the only comprehensive virtual care delivery solution,opportunities around the Advance Medical acquisition,the ramp of the CVS relationship and potential to expand the addressable market over time by adding new capabilities.Our views on the dental distributors(HSIC and PDCO)are unchanged.Growth in
21、 U.S.dental consumables continues to remain subdued but stable,and it remains unclear when we could see a rebound.HSIC is positive on the outlook and highlighted a wide array of value-added products and services,which it believes is a key differentiator.While there is more work to be done,PDCO laid
22、out a broad 3-year strategy,which includes stabilizing the core(FY19),accelerating performance(FY20)and expanding products and services(FY21).That said,we continue to have concerns around margin pressure across the group going forward,and believe both stocks are expensive,especially given near term
23、concerns and relative to longer term projected EPS growth rates.Healthcare IT remains focused on cross sell to drive growth,VBC getting warmer.With the core EHR market slowing,companies were focused on cross sell to drive growth in excess of 3.5%global Healthcare IT spend growth.Population health re
24、mains slow to catch on,but companies spoke to being encouraged around HHSs focus on shifting to Value Based Care,and CMSs redesign of the ACO program.RCM remains a point of strength given its tangible ability to drive ROI for providers.Allscripts highlighted the payer&life sciences channel as a new
25、avenue for growth,laying out a target of 15-25%growth in this segment over the next 3 years.Finally,patient engagement was highlighted as a way to capture the consumer trend.We expect continued M&A in the space,as all companies spoke to inorganic growth as a forward driver.Today,the J.P.Morgan Healt
26、hcare 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:Services(Gill,Taylor)3North America Equity Researc
27、h14 January 2019Lisa C.Gill(1-212)622- will be at 10:00am ET,MedTech&Life Sciences Tools(Marcus,Peterson)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 J.P.Morgan sales contact1.1On January 3,2018,MiFID II came
28、 into effect.Therefore,you may only be eligible to participate in this event if you have the appropriate level of access to J.P.Morgan research.Please check your eligibility before participating/accessing.4North America Equity Research14 January 2019Lisa C.Gill(1-212)622- Last week we hosted our 37t
29、h Annual Healthcare Conference in San Francisco.While there was not a significant amount of incremental news flow across our group,as always,we saw it as a great opportunity to interact with management teams and hear about broader market conditions,and company-specific initiatives and expectations a
30、cross our coverage universe.All of the companies we follow presented at the conference,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:co
31、nsumerism,specialty,the shift to value-based care and capital deployment.However,sentiment across the majority of our coverage universe remains somewhat weak,as we point to ongoing uncertainty around the regulatory environment and concerns over margin pressure.In the following note,we highlight some
32、 of the key themes and provide takeaways from each of the presentations.Today,the J.P.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
33、a deeper dive into individual names and sectors:Services(Gill,Taylor)will be at 10:00am ET,MedTech&Life Sciences Tools(Marcus,Peterson)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 J.P.Morgan sales contact.Sum
34、maryUnlike some prior years,the 2019 conference was relatively quiet as it relates to incremental newsflow across our coverage universe.Among the new developments:CVS provided color on headwinds/tailwinds for 2019;Diplomat provided updated guidance for FY18 and a preliminary outlook for 2019;Teladoc
35、 provided color on the selling season and an expansion of the United agreement;Owens&Minor announced a new multi-year distribution agreement with Scripps Health;Allscripts announced a 3-year revenue plan and a partnership with Microsoft;and HealthEquity provided year end account metrics.Stock Perfor
36、manceThe companies within our coverage universe that presented at the conference were up 3.6%,on average,during the conference,which compared to a 2.6%increase in the S&P 500.This marked the third consecutive year that our coverage universe outperformed the S&P 500 during the conference(see Figure 1
37、 below).5North America Equity Research14 January 2019Lisa C.Gill(1-212)622- 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 IndexSource:Bloomberg,J.P.Morgan.Among the various sub-sectors
38、,the dental distributors and pharma distributors were the two best performing sub-sectors,up by an average of 5.9%and 5.0%,respectively,in 2019,while PBM/Specialty and Retail Pharmacy were the two worst performing subsectors in 2019(see Table 1 below).Finally,in Figure 2 below,we show the performanc
39、e by individual company,with MDRX,TDOC and OMI delivering the best performance,and DPLO,EVH and HQY seeing the largest declines.Table 1:Performance by Sub-Sector during the 2018 and 2019 J.P.Morgan Healthcare Conferences20182019Pharma Distribution5.2%5.0%Retail Pharmacy6.5%1.7%PBM/Specialty7.1%-6.4%
40、Clinical Lab1.7%2.4%Dental Distribution-1.4%5.9%Healthcare IT2.2%3.8%Coverage Universe avg.3.4%3.6%S&P 5000.9%2.6%Source:Bloomberg,J.P.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;Clini
41、cal Lab includes DGX and LH;Dental Distribution includes HSIC and PDCO;Healthcare IT includes CERN,PINC,TDOC,EVH,HQY,MDRX and NXGN in 2019 and CERN,PINC,TDOC,ATHN,COTV,EVH,HQY,MDRX and NXGN in 2018.-5.0%-2.5%0.0%2.5%5.0%20152016201720182019Healthcare Technology&DistributionCoverage UniverseS&P 500S&
42、P 500 Health Care Index6North America Equity Research14 January 2019Lisa C.Gill(1-212)622- Figure 2:Stock Price Performance during the 2019 J.P.Morgan Healthcare ConferenceSource:Bloomberg,J.P.Morgan.Key ThemesWe continue to believe the long term fundamental outlook across the Rx channel and our pos
43、itive 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
44、consumerism to be a key driver going forward);expected growth in specialty(strong top line growth,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 deployme
45、nt(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 presentatio
46、ns and breakout sessions.Consumerism was a key theme discussed at the conference by a number of companies within our coverage universe.We continue to believe the consumer will be the biggest disruptor in healthcare.With healthcare rising as a percentage of household expenditures,patients are becomin
47、g more involved in making decisions on how to allocate their healthcare dollars,and are becoming increasingly selective in the services they use with cost,quality,and convenience being key deciding factors.Engaging the patient at their preferred point of service in a low cost way will likely differe
48、ntiate those with a strong reputation and a trusted brand.Several companies spoke to this trend,including the retail pharmacies,the clinical labs and Teladoc.The companies across the Rx channel discussed specialty as an opportunity going forward.We highlight the strong growth of existing products,as
49、 well as a robust pipeline as key top-line drivers over the coming years.CVS highlighted its leading specialty pharmacy business,which it pointed to as a tailwind for MDRX,12.6%TDOC,12.4%OMI,10.9%MCK,6.7%HSIC,6.7%CAH,5.9%PDCO,5.2%WBA,4.2%NXGN,3.9%CERN,3.5%RAD,2.8%DGX,2.4%ABC,2.4%LH,2.3%PINC,1.8%CVS,
50、-1.9%HQY,-3.4%EVH,-4.0%DPLO,-6.4%7North America Equity Research14 January 2019Lisa C.Gill(1-212)622- 2019,WBA pointed to the mail/specialty JV with Prime Therapeutics,and RAD cited its specialty pharmacy capabilities within the EnvisionRx PBM business.Diplomat pointed to its high touch model and str
