1、North America Equity Research21 January 2020 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 32 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 38th Annual J.P.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 T
4、eladoc 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 broade
5、r 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 5.6%on average during the conference,vs.a 1.6%increase in the S&P 500,marking the fourth consecutive year of outperform
6、ance.Beginning at 9am EST today,the J.P.Morgan Healthcare team will host a series of calls with takeaways from the conference(please contact us or your J.P.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 cont
7、inue 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 wasnt anything new that came out of the conference,
8、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
9、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 Un
10、itedHealthcares 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 e
11、stimates 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 a
12、nd 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 engagem
13、ent 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 la
14、rge retail pharmacy chains are well-positioned.The pharma distributors pointed to stabilization of the core pharma 2North America Equity Research21 January 2020Lisa C.Gill(1-212)622- distribution business,although there was no update on the opioid front.While it is still early in the year,all three
15、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
16、 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 fo
17、r 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.Labcorps new CEO presented at our conference,and outlined his 5 key priorities for the organization.We believe his background at Merck positions him well
18、 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 c
19、ontracts 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 companys consumer centric positioning through their partnershi
20、p 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 lea
21、ding 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 i
22、mpressive outlook,based on runway in the core telehealth market,TDOCs strong competitive positioning as the only comprehensive virtual care delivery solution,opportunities around the expansion of the United relationship,the ongoing rollout of CVSs telehealth offering,potential opportunities in the M
23、edicare 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 U.S.dental consumables continues to remain subdued but stable,and it continues to remain unclear when we could see a rebound.HSI
24、C 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
25、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 EP
26、S 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
27、 more rapidly as patient engagement,care coordination,personalized medicine,and life sciences.The most commonly discussed avenue of focus was 3North America Equity Research21 January 2020Lisa C.Gill(1-212)622- the patient as a consumer,with many companies investing to align with this trend.Our two f
28、avorite 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,wi
29、th mixed commentary around the pace of change.Margin capture was also a theme,particularly at Cerner,which highlighted its 22.5%target,which it plans to achieve largely through portfolio management(pruning low margin businesses),facility rationalization,and process improvements.As companies seek gro
30、wth 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 Administrat
31、or 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 penaliz
32、ing 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 puttin
33、g 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 import
34、ant 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 J.P
35、.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,Pe
36、terson)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 J.P.Morgan sales contact.4North America Equity Research21 January 2020Lisa C.Gill(1-212)622- Last week we hosted
37、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 man
38、agement 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 fo
39、r 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 un
40、iverse 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 J.P.Morgan Healthcare team will host a conference call series starting at 9:00a
41、m 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
42、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.SummaryThe 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 de
43、velopments: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
44、 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 ConferenceThe companies within our coverage universe that participated in the conference this
45、 year were up 5.6%,on average,during the conference,which compared to a 1.6%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 perio
46、d(399 bps).5North America Equity Research21 January 2020Lisa 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-sect
47、ors,the dental distributors and pharma distributors were the two best performing sub-sectors,up by an average of 7.1%and 6.4%,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).Fi
48、nally,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 J.P.Morgan Healthcare Conference(2018-2020)201820192020Pharma Distribution5.
49、2%5.0%7.1%Retail Pharmacy6.5%1.7%2.9%PBM/Specialty7.1%-6.4%N/AClinical Lab1.7%2.4%0.2%Dental Distribution-1.4%5.9%6.4%Healthcare IT2.2%3.8%5.1%Coverage Universe avg.3.4%3.6%5.6%S&P 5000.9%2.6%1.6%Source:Bloomberg,J.P.Morgan.Note:Pharma Distribution includes ABC,CAH and MCK;Retail Pharmacy includes C
50、VS,RAD and WBA;PBM/Specialty includes DPLO in 2019 and ESRX and DPLO in 2018;Clinical Lab includes DGX and LH;Dental Distributionincludes 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,TDO