This morning (09-20-17) ANTM announced it would acquire HealthSun, a Florida Med Adv plan with 39k members focused on the dual-eligible population. HealthSun also owns 19 primary care and specialty centers. HealthSun achieved a 4.5 star rating from CMS for the 2017 and 2018 plan years. Financial terms were not disclosed but ANTM expects the deal to close by the end of 2017 and to be slightly accretive to 2018 earnings. Post the deal ANTM’s Medicare and Medicaid plans will serve over 650k+ members in FL. We note that ANTM had previously expected to end 2017 with ~$2B of parent cash and that the company seemed to be prioritizing strategic M&A over share repurchase with these $.
Search Coverage List, Models & Reports
Search Results1-10 out of 344
Wolfe Research's Senior Healthcare Services Analyst, Justin Lake, hosted a webcast to address the questions about MCO growth given the outlook for Medicare Advantage in 2018.
The increasing role of MCOs in government health care programs is a critical growth driver for the industry and Med Adv is widely viewed as the single most compelling end market in the sector due to a combination of strong underlying demographics, share gains vs. FFS and a relatively stable reimbursement outlook. Heading into 2018, most companies we cover are expecting to grow at or above the ~ 6% growth rate of the overall market. One of the most frequent questions we get from investors is whether it is plausible that the plans in our coverage universe can hit growth targets given most expect above market growth – in short how can everyone be “above average”.
Yesterday (9/12/17), after market close, CNC announced that it had entered into an agreement to acquire Fidelis / NY Catholic Health Plan in an asset sale for $3.75B with an expectation for the deal to be immediately accretive upon closing. While subject to customary regulatory approvals, CNC has already obtained fully committed bridge financing of $3.75B and will fund the purchase with $2.3B of new equity and $1.6B of LT debt. Assuming a 1/1/18 closing date, CNC expects to generate revenue over $60B in 2018 (in line w/previous guidance + Fidelis), deliver high single digit EPS accretion in 2018, and low to mid-teens accretion in 2019. This accretion is expected to be driven in part through synergies largely attributable to medical expenses ($25M in 2018 and $100M in 2019). On the balance sheet side, the net assets will be delivered at a 350% RBC ratio (in-line with CNC’s) and the transaction is expected to remain neutral to the debt-to-capital ratio with CNC committing to reducing its debt-to-capital ratio under 40% over the next 18 months – the net result of which is an expectation that CNC will maintain its current debt ratings. Overall, we believe this will be value accretive to shareholders given the reasonable price paid (7.5x PF19 EBITDA) for what is a well-managed company and expect the market to react positively tomorrow.
We are revisiting our exchange earnings estimates for 2018 post additional color from conversations with mgmt on 2 key moving parts: (1) stranded SG&A and (2) membership. On SG&A, in addition to the typical stranded costs associated with market exits, ANTM has decided to leave some level of infrastructure in place within the exited markets to allow the co to re-enter smoothly in 2019 should the market stabilize. On membership, we estimate a -50% decline YoY vs. previous -20% (more below). To be clear we still see exchange results as a tailwind to 2018 EPS, but the combination of the two above mentioned factors shifts exchange results in our model from a ~$0.62 y/y tailwind previously estimated to a $0.38 y/y tailwind currently in 2018 ($0.24 worse) with a modest offset from slightly higher Med Adv enrollment growth now assumed (10% vs. 7% previously). It is important to note that when thinking about ANTM 2018 exchange tailwinds that the co. starts from a fundamentally different place than peers such as AET/HUM/UNH in that those peers were generating significant negative margins / losses and thus exiting was very accretive even after deleveraging. ANTM on the other hand has relatively minimal losses such that exiting (after deleveraging) isn’t accretive – they need to generate profits on remaining members to drive a YoY tailwind. Our 2018 EPS decreases to $12.70 from $12.90 (full bridge on page 2), w/ YE 2017 target now $199 from $202.
ANTM is materially underperforming the MCO group today (9/12) (-3.5% vs. group down 0-1%) seemingly due to management commentary in investor meetings at a competitor conference on the trajectory of exchange profitability into 2018. It appears that ANTM management noted that there will likely be some headwind from fixed cost deleveraging in the exchange business given planned market exits. While the potential overall magnitude of exchange exits/improvement in 2018 is still to be determined, it is clear that ANTM does need some offset to HIF timing headwind (we forecast ~$0.50 YoY in 2018) and thus the trajectory of exchanges is indeed an important component to 2018 earnings power. As we illustrate on Exhibit 1 on page 2 of this note if exchanges are not a tailwind to 2018 results both our estimates and consensus EPS for 2018 look difficult to achieve. Our estimates assume individual market revenue is relatively flat in 2018, with ~20% PMPM growth generally offsetting a ~20% membership decline including management’s decision to exit markets that house ~30% of membership. We model net margins improving from negative 0.7% to +1.5%, which contributes $0.62 to our 2018 EPS growth and our 2018 ANTM EPS is $12.90 vs. consensus $13.00. Every 100bps to net exchange margins = $0.29. Please see our recent slide deck regarding 2017 results and bridging to 2018 growth expectations which lays out our thoughts around 2018 earnings power for MCOs in significant detail, and see page 2 for our 2018 EPS bridge for ANTM specifically.
This morning (9/11) it was reported that UNH has entered a non-binding exclusive agreement to acquire Banmédica SA, a Chilean health care company that has both provider (hospital / clinic) and health insurance operations, for $2.8B. It appears the agreement will become binding following the completion due diligence and certain contractual arrangements. At current exchange rates Banmédica SA generated $2.3B of revenue, $169M of EBITDA (7.4% of rev), $156M of pretax income (6.8% of rev) and $106M of net income (4.7% of rev) in 2016 per the company’s annual report implying UNH would be paying 26.4x prior year net income. According to local press reports UNH previously considered an acquisition of Banmédica SA in 2012 and again in 2014. Recall that in 2012 UNH entered Brazil via its $4.9B purchase of Amil Participações S.A. We would not expect much market reaction given UNH’s strong solid history of capital deployment but would note that some may look back to Amil and note the tough start that business endured (mostly due to regulatory change) before stabilizing.
This afternoon (9/8/17) California State Senator Ricardo Lara, author of Senate Bill 349 (dialysis clinic staffing ratios), announced that he will not seek an Assembly floor vote before the end of the current legislative session which concludes 9/15/17. Lara intends to bring the bill back up for consideration later in the year after stakeholder meetings have been held. While this bill could come back, it would appear that even in the Democratic controlled CA Legislature there may not have been enough support after a full vetting. We view this as a meaningful positive. As of now we are unsure of the status of Assembly Bill 251 (dialysis clinic profitability restrictions) as this was moved to “inactive” status in the Senate yesterday – but can still be recalled for a vote before the end of the session.
There are currently two bills progressing through the California legislature that would add to dialysis industry regulation: Senate Bill 349 (dialysis clinic staffing ratios) and Assembly Bill 251 (profitability restrictions). Both bills have already passed floor votes in their respective introducing chamber and have been making their way through the committee process in the opposite chamber. On Friday both bills cleared appropriations committee votes and will now proceed to floor votes. It doesn’t appear that dates have been set for the floor votes at this time but we note that the deadline for passing final bills this legislative calendar year in California is 9/15/17. If the bills pass those floor votes they will go to the desk of Governor Jerry Brown to sign into law or veto. These bills have received significant support from the Service Employees International Union-United Health Workers (SEIU-UHW).
Wolfe Research's Senior Healthcare Services Analyst, Justin Lake, hosted a webcast on the MCO Industry into 2018.
- 1 of 35
- next →