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瑞信-美股-生命科学诊断行业-二季度预览:季度内趋势剖析-716-29页.pdf
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瑞信-美股-生命科学诊断行业-二季度预览:季度内趋势剖析-716-29页.pdf
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse 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 a single factor in making their investment decision.
16 July 2019
Americas/United States
Equity Research
Life Science Tools and Diagnostics
Distributor Update
THEME
Research Analysts
Erin Wilson Wright
212 538 4080
erin.wright@credit-suisse.com
Katie Tryhane
212 325 2713
katie.tryhane@credit-suisse.com
George Engroff
212 325 2289
george.engroff@credit-suisse.com
2Q Preview: Dissecting intra-quarter trends
■ Easing Concern Over Drug Distributors: Shares for drug distributors,
including AmerisourceBergen (ABC, Outperform) and Cardinal Health
(CAH, Outperform) are currently trading at a 7.5x FY+2 EV/EBITDA on
average, a meaningful discount to their 8.6x five-year historical average,
with ongoing concerns related to opioids, Amazon, and continuing drug
pricing scrutiny, albeit with some NT relief following the Trump
Administration’s announcement not to pursue changes to Medicare Part D
rebate rules. We also note company-specific headwinds ranging from
continued integration headwinds, Medical segment woes (CAH), and
manufacturing suspensions (PharMEDium, ABC—albeit already stripped
from guidance). In terms of 2Q reports, our view is that some stability in the
generic drug pricing environment as well as healthier than previously
expected branded price inflation should drive potentially less volatile C2Q
reports, consistent with commentary from our ABC NDR (see Management
Meeting Takeaways). Investor concern likely remains on flagging execution
in ancillary offerings and recent management departures, namely for CAH
where investor sentiment is, in our view, the lowest ahead of its FY20 initial
guidance. We are tempering our outer year FY20 EPS estimates for CAH
to $5.15 (from $5.35), better reflecting ongoing Medical segment woes,
albeit stabilizing pharmaceutical segment performance. While medical and
profit headwinds represent continuing headwinds for CAH, we continue to
view contributions from this potentially faster growing, more profitable, and
oftentimes more capital efficient ancillary business will support its market
positioning over time with improved execution.
■ Medical Distribution—Maintain cautious outlook on OMI: On the
medical distribution side, we remain negatively disposed toward Owens &
Minor (OMI, Underperform). While a turnaround story is not off the table for
OMI, where it disclosed improving service levels in 1Q, we view it may be
much longer term in nature, where a tumultuous 2018 experience,
commodity pricing pressures, and management flux has weighed on results
and broader investor sentiment. We also note certain previously
announced customer losses will more materially impact OMI’s 2020 results,
suggesting overhangs will remain over the medium term. We are reducing
our target price to $3.05 (from $4.00) on lower conviction in OMI’s longer
term outlook, particularly given OMI is inherently less nimble with 5.9x TTM
net leverage, driving incremental risk in a rapidly evolving healthcare
continuum.
16 July 2019
Distributor Update 2
■ Lackluster Rx volume, but stabilizing generic pricing dynamics:
According to IQVIA, adj. prescription volume rose 0.2% in May, a modest
acceleration from flat growth in April 2019 (QTD average volume growth of
+0.1%). Based on our analysis of the total generic drug sales as reported
by IQVIA on an unweighted basis, the sell-side ASP for generic
therapeutics fell 2.4% in May, a deterioration from the 2.2% rise in April. On
a sales-weighted basis, generic pricing declined 2.9% in May, compared to
the -1.9% experience in April. Moreover, according to April NADAC data, a
survey performed by the CMS to gauge the average national acquisition
costs for retail pharmacies across the US, 32.3% of all reported generics
experienced price declines in excess of 5%, an improvement from the
March experience (43.0%). For context, ongoing generic price deflation
over the past two years has weighed on drug distributors, as price declines
have led to lower gross profit dollars, and while we do not expect a
significant reversal NT, the supply chain group has noted stabilizing trends
QTD, aligned with our analysis.
16 July 2019
Distributor Update 3
Summary
A continuing lackluster utilization environment, as evidenced by IQVIA data and metrics
from pharmacy supply chain constituents, may continue to hamper quarterly performance
for drug distributors. That said, a modestly stabilizing generic pricing landscape is
somewhat encouraging, as well as an incrementally healthier branded price inflation
environment than previously expected (or at least better visibility thereon), potential
sources of near term relief. That said, we acknowledge notable risks in opioid litigation and
broader drug pricing scrutiny. All in, we continue to favor distributors with exposure to
faster-growing, higher-margin ancillary services, which should provide diversification from
drug utilization/pricing, among other supply chain dynamics, while also providing higher
growth/profit potential longer term.
To that end, we favor AmerisourceBergen (ABC) as we continue to view contributions
from its non-traditional businesses including MWI, World Courier, among others as
encouraging (excluding PharMedium). ABC is also experiencing respectable performance
across its core segment of late, a notable trend. Cardinal Health (CAH) should benefit
from a faster growing specialty pharmacy business as well as gradual stepped-up
contributions from its Medical segment following its recent Medtronic Patient Recovery
acquisition, albeit acknowledging execution on Medical segment deal integration has not
been smooth. While the quarterly performance at CAH has tested our patience, and the
recent CFO departure announcement (effective August 9) may cause some unease, we
continue to believe its diversification efforts will bear fruit, albeit a longer term dynamic
than originally anticipated, particularly as it addresses headwinds at Cordis, with the
implementation of technology initiatives and management changes.
In medical distribution, we remain negatively disposed toward Owens & Minor (OMI), a
company which has only more recently begun its journey (via large acquisitions) to
incorporate self-manufactured products into its strategy to support its positioning in the
medical distribution market. While a turnaround story is not off the table for OMI, we view it
may be much longer term in nature, where a tumultuous 2018 experience, commodity
pricing pressures, and management flux has pointed to significant concerns in its core
business. Moreover, with 5.9x net leverage (on TTM EBITDA), OMI is inherently less
nimble, driving incremental risk in a rapidly evolving healthcare continuum.
Below, we include our high-level thoughts on recent industry trends, as well as our
expectations for each distributor heading into the quarter.
16 July 2019
Distributor Update 4
Figure 1: CS Healthcare Subsector Performance
2012 2013 2014 2015
Biotechnology 57.6% Specialty Pharma 91.7% Managed Care 42.6%
Contract Services 42.0%
Hospitals 37.3% Drug Retailers & PBMs 81.2% Biotechnology 38.8% Managed Care 19.8%
Contract Services 37.2%
Biotechnology 71.4% Specialty Pharma 37.3%
Diagnostics 18.9%
Drug Retailers & PBMs 32.7%
Drug Distributors 63.8%
Hospitals 36.9%
Dental* 14.3%
Diagnostics 31.8% Contract Services 57.1%
Drug Retailers & PBMs 29.1%
Animal Health 11.4%
Animal Health 27.7%
Healthcare Technology 46.1% Medical Devices 28.1%
Clinical Laboratories 10.3%
Life Science Tools 22.0%
Hospitals 44.0%
Drug Distributors 25.9% Life Science Tools 8.9%
Medical Devices 16.9% Medical Devices 40.9%
Dental* 23.9%
Drug Retailers & PBMs 7.9%
Drug Distributors 14.0%
Managed Care 40.3%
Diagnostics 23.2%
Medical Devices 7.7%
S&P 500 Index 13.4%
Life Science Tools 38.9% Contract Services 22.1%
Biotechnology 7.6%
Specialty Pharma 9.0%
Dental* 37.0% Clinical Laboratories 21.7% Drug Distributors 6.9%
Large Cap Pharma 7.5% S&P 500 Index 29.6%
Animal Health 19.7%
Specialty Pharma 3.8%
Dental* 6.7% Diagnostics 27.9%
Large Cap Pharma 14.0% Large Cap Pharma 2.2%
Managed Care 5.9% Large Cap Pharma 27.1%
Life Science Tools 12.0%
Healthcare Technology 1.5%
Healthcare Technology 3.2%
Animal Health 24.0%
S&P 500 Index 11.4% S&P 500 Index -0.7%
Clinical Laboratories 0.6% Clinical Laboratories -1.3%
Healthcare Technology -6.6% Hospitals -17.9%
2016 2017 2018 2019 YTD (as of 7/15/19)
Animal Health 24.6%
Managed Care 47.5% Medical Devices 17.3%
Clinical Laboratories 31.3%
Clinical Laboratories 16.5% Life Science Tools 40.5%
Healthcare Technology 16.0%
Life Science Tools 29.2%
Managed Care 12.1%
Diagnostics 37.9% Diagnostics 15.4% Dental* 28.4%
Medical Devices 11.1%
Animal Health 35.5%
Managed Care 9.3%
Contract Services 26.2%
Contract Services 10.0%
Healthcare Technology 40.4% Large Cap Pharma 8.6% S&P 500 Index 20.2%
S&P 500 Index 9.5%
Contract Services 28.7% Animal Health 2.6% Drug Distributors 19.5%
Healthcare Technology 4.6% Medical Devices 22.5%
Contract Services 2.5%
Medical Devices 17.5%
Dental* 3.0%
Biotechnology 22.3%
Life Science Tools 2.3% Animal Health 13.5%
Life Science Tools 2.5%
S&P 500 Index 19.4% Hospitals -6.0% Healthcare Technology 10.9%
Large Cap Pharma -1.4%
Dental* 16.9%
S&P 500 Index -6.2% Managed Care 9.1%
Diagnostics -8.3% Clinical Laboratories 15.7%
Biotechnology -8.6%
Diagnostics 7.4%
Drug Retailers & PBMs -9.6% Large Cap Pharma 10.9% Specialty Pharma -14.7% Specialty Pharma 4.5%
Biotechnology -21.9%
Drug Distributors 4.5% Clinical Laboratories -18.1%
Biotechnology 5.5%
Drug Distributors -24.3%
Hospitals -3.8%
Drug Distributors -25.1%
Large Cap Pharma -0.7%
Hospitals -29.9% Specialty Pharma -12.8% Drug Retailers & PBMs -26.5% Hospitals -4.3%
Specialty Pharma -36.2% Drug Retailers & PBMs -22.0%
Dental* -27.8%
Drug Retailers & PBMs -22.8%
Source: FactSet, Credit Suisse; Note: Dental peer group does not include Align Technologies (ALGN); Prices as of 11AM ET on July 15, 2019
A quick cut of our previous quarter takeaways and C1Q outlook
■ ABC’s shares rose 5% following its F2Q operational beat on lower revenue offset by
stronger profitability, on a better underlying core pharmaceutical distribution profit
experience. In conjunction with the report, ABC reaffirmed its operational guidance for
the year, despite the beat, implying a tempered 2H profit experience relative to
previous expectations. Despite ongoing PharMEDium woes and risk factors in supply
contracts, we highlight revenue and profit drivers in a potentially stabilizing generic
pricing environment, WBA’s maturing pharmacy network relationships, RAD
onboarding, ESRX relationship, and contributions from other diversified non-core units.
Despite focus on the competitive landscape evolution, previously reported pharmacy
underperformance, continuing drug pricing scrutiny, and opioid litigation, ABC have
risen 27% since a recent low on April 22 (vs. 4% S&P 500). All in, we are forecasting
F3Q EPS of $1.57 (+1.7%, vs. Consensus $1.62), predicated on +4.8%
Pharmaceutical Distribution growth, tempered by ongoing headwinds at PharMEDium,
and +4.0% Other growth, as well as a 5 bps EBITDA margin expansion.
■ CAH’s F3Q handily exceeded our estimate on stronger revenue more than offset by
weaker profitability, with factors below the line driving the beat (+$0.23). Despite the
meaningful operational miss driven by weak Medical segment performance, where
Medical operating profit is now expected to decline LSD-MSD (vs. prior rise MSD-HSD)
in FY19, shares rose 0.5% on admittedly weak expectations. More encouragingly, CAH
announced it has renewed its CVS Health relationship through June 2023,
underscoring the value it provides to its large partners. All in, expectations still appear
low as we await FY20 guidance, particularly following the recently announced
departure of CFO Jorge Gomez (effective August 9). That said, we view upside
potential may stem from healthier than expected branded pricing inflation, a stabilizing
generic pricing environment, continuing strength in its Patient Recovery business, and
cost saving opportunities. Though we note CAH’s quarterly missteps have challenged
16 July 2019
Distributor Update 5
our patience, we continue to remain positively disposed toward the stock, given the
aforementioned opportunities, and view a clearer path to profitability at Cordis,
improved execution in Medical more broadly, and a solid CFO appointment can
reestablish enthusiasm for shares. That said, the timeline on these dynamics is not
exactly clear. We forecast F3Q EPS of $0.93 (-11.4%, in line with Consensus),
predicated on +4.3% revenue growth (incl. +5.0% Pharmaceutical, -1.0% Medical) and
operating margin expansion (10 bps; -6 bps Pharma segment).
■ While OMI’s 1Q exceeded our conservative estimate on better revenues and
profitability, it missed Consensus driving its shares lower. That said, we are heartened
by new management’s vision, where we view a turnaround story isn’t out of the picture,
where management has noted improved service levels y/y. That said, a full-fledged
turnaround is likely much longer term in nature, where it endured incremental customer
losses in 1Q in response to previously disclosed 2018 services issues caused by
vendor M&A, natural disasters, high internal turnover, and other factors. Moreover,
OMI remains meaningfully levered at 5.9x TTM EBITDA, and we view further downside
as warranted given ongoing competitive challenges amidst likely lackluster
fundamental demand. We are forecasting F2Q EPS of $0.07 (in line with Consensus),
predicated on -0.9% revenue growth, including -4.6% Global Solutions growth and
+186.2% Global Products growth, as well as EBITDA margin contraction of 33 bps.
Figure 2: Distributor FY+2 P/E ratio
Figure 3: Distributor FY+2 EV/EBITDA ratio
3.0x
5.0x
7.0x
9.0x
11.0x
13.0x
15.0x
17.0x
19.0x
21.0x
23.0x
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18
Mar-19
Jul-19
Hist Avg ABC CAH MCK OMI
Historical Averages
ABC: 14.4x
CAH: 13.0x
MCK: 12.3x
OMI: 13.6x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
Jul-14
Nov-14
Mar-15
Jul-15
Nov-15
Mar-16
Jul-16
Nov-16
Mar-17
Jul-17
Nov-17
Mar-18
Jul-18
Nov-18
Mar-19
Jul-19
Hist Avg ABC CAH MCK OMI
Historical Averages
ABC: 8.9x
CAH: 8.2x
MCK: 8.6x
OMI: 8.2x
Source: FactSet, Credit Suisse estimates; Prices as of 11AM ET on July 15, 2019; Note: All
MCK values are on a Consensus estimates
Source: FactSet, Credit Suisse estimates; Prices as of 11AM ET on July 15, 2019; Note: All
MCK values are on a Consensus estimates
Divergent Business Models
While the drug distributors were traditionally seen as largely homogenous, their varying
approaches to capital deployment and strategic positioning in a rapidly evolving healthcare
environment have contributed to greater differentiation between their business models,
with each company now earning a more substantial portion of its consolidated operating
profit from businesses outside of traditional US pharmaceutical distribution. As it relates to
medical distribution, we view a hybrid approach as necessary to successfully compete in
the market, where constituents further skewed to proprietary branded products
manufacturing as better positioned (vs. a pure play medical distribution model). Below we
review business operations of each distributor outside of the traditional drug distribution
model, highlighting how the business strategies are diverging.
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