Perspectives

Perspectives on Stock Selloff Following CVS 4Q Earnings Report

March 18, 2021

Although CVS Health Corp.’s stock price dropped about 5% after the company reported its fourth-quarter and full-year 2020 financial results on Feb. 16, equities analysts seemed to be unshaken in their view that the firm — which owns health insurer Aetna — has strong fundamentals, AIS Health reported.

For the fourth quarter of 2020, CVS’s net income of $975 million was down 44% compared with the prior-year period, a result the company partially attributed to lower operating income driven by the impact of the COVID-19 pandemic on its Health Care Benefits and Retail/Long-Term Care segments. For the full year 2020, CVS’s operating income and net income increased relative to 2019.

Although CVS Health Corp.’s stock price dropped about 5% after the company reported its fourth-quarter and full-year 2020 financial results on Feb. 16, equities analysts seemed to be unshaken in their view that the firm — which owns health insurer Aetna — has strong fundamentals, AIS Health reported.

For the fourth quarter of 2020, CVS’s net income of $975 million was down 44% compared with the prior-year period, a result the company partially attributed to lower operating income driven by the impact of the COVID-19 pandemic on its Health Care Benefits and Retail/Long-Term Care segments. For the full year 2020, CVS’s operating income and net income increased relative to 2019.

Total revenues in the fourth quarter and full-year 2020 increased 4% and 4.6%, respectively, compared with the prior year, according to CVS’s earnings release. The company’s fourth-quarter adjusted earnings per share of $1.30 beat the Wall Street consensus of $1.24.

In a Feb. 17 note, Citi analyst Ralph Giacobbe said his firm views CVS’s results “as generally balanced, with better performance within PBM and health benefits, and in line for its retail segment.” Nevertheless, he acknowledged that “we received a number of calls/emails on the heels of the CVS 4Q20 print/guidance and the subsequent sell-off in shares.”

In their own Feb. 17 note, Evercore ISI analysts weighed in that “CVS’s stock price is down ~5% as we write, which seems overdone to us.” The company’s 2021 guidance “was in-line with prior commentary, which makes sense given that there is little incentive to be aggressive at this point in the year and with Karen [Lynch] just taking over the reins,” they added. Lynch, formerly president of Aetna, replaced the retiring Larry Merlo as CVS CEO on Feb. 1.

Giacobbe observed that CVS’s “commentary around utilization assumptions for the year also raised questions/concerns, as management noted that it was not projecting high levels of pent-up demand given system capacity constraints.”

Lynch said during earnings call that in the fourth quarter the company saw utilization of total health care services “return to more near-normal seasonal levels as higher COVID-related costs were partially offset by somewhat lower levels of traditional services.”

CVS said total medical membership in its Health Care Benefits segment rose by about 140,000 from the third to fourth quarters, reaching 23.4 million. That largely reflected enrollment increases in its Medicaid and Medicare plans, but those gains were partially offset by a 35,000 decline in commercial enrollment.

Perspectives on Pass-Through Rebate Models

March 4, 2021

With the Trump administration’s rebate rule delayed and possibly slated for repeal by Democrats in Congress, major changes in how the PBM industry distributes rebate revenue will have to come from the private sector, AIS Health reported.

The Biden administration will suspend implementation until 2023 of the so-called “rebate rule,” a Trump administration regulation that would have revamped the Medicare prescription drug rebate system, and DC insiders expect the regulation will be repealed by Congress before then. Meanwhile, a growing number of PBMs that deal in the commercial market have pitched plan sponsors on a 100% pass-through rebate structure, in which the PBM collects its compensation through a fee or surcharges rather than diverting a share of rebate revenue.

With the Trump administration’s rebate rule delayed and possibly slated for repeal by Democrats in Congress, major changes in how the PBM industry distributes rebate revenue will have to come from the private sector, AIS Health reported.

The Biden administration will suspend implementation until 2023 of the so-called “rebate rule,” a Trump administration regulation that would have revamped the Medicare prescription drug rebate system, and DC insiders expect the regulation will be repealed by Congress before then. Meanwhile, a growing number of PBMs that deal in the commercial market have pitched plan sponsors on a 100% pass-through rebate structure, in which the PBM collects its compensation through a fee or surcharges rather than diverting a share of rebate revenue.

Jeff Levin-Scherz, M.D., national co-leader of the health management practice at Willis Towers Watson, says that passed-through rebates can flow in two directions after they are in employers’ hands.

“Employers have been moving to pass-through rebates where the PBM will give 100% of the rebate to the employer,” which the employer can then spend on its larger medical benefit, lowering premiums, Levin-Scherz says. “Point of care or point of sale rebates are different, where the rebate is essentially put into the purchase price [of a drug].”

Ge Bai, Ph.D., an associate professor at Johns Hopkins University’s Carey Business School and Bloomberg School of Public Health, says that passing through rebates better aligns the incentives of a PBM and a plan sponsor.

“I think for the large, self-funded employers, the issue is more about product selection,” Bai says. “And the employers are frustrated by some inefficient product selection choices made by the PBMs on the formulary….it’s one reason why employers want the rebate pass-through — it will reduce the PBM’s incentive to make money from high-price, high-rebate drugs.”

However, Bai also says that explains why some employers opt for a traditional rebate model: for firms that don’t expect to have high levels of drug spending by members, the lower premium offered by the traditional rebate model may be more appealing.

Like Bai, Daniel Nam, Pharm.D., associate principal for pharmacy policy at Avalere Health, says that prices and premiums will ultimately decide which approach becomes dominant in the marketplace.

“I think it really depends on the bottom-line price that the PBM is willing to offer to the employer or the health plan,” he says.

Perspectives on Developments to Watch in Pharma

February 18, 2021

In 2021, the three main “developments to watch” in the branded pharmaceuticals sector will include COVID-19 vaccine scale-up and distribution, continued legislative and regulatory pushback against high drug prices, and robust levels of merger and acquisition activity, according to a new report from Moody’s Investors Service.

Regarding vaccines, Moody’s noted that Moderna Inc. as well as Pfizer Inc. and its partner BioNTech will continue to ramp up production of their COVID-19 vaccines and distribute them widely throughout 2021.

In 2021, the three main “developments to watch” in the branded pharmaceuticals sector will include COVID-19 vaccine scale-up and distribution, continued legislative and regulatory pushback against high drug prices, and robust levels of merger and acquisition activity, according to a new report from Moody’s Investors Service.

Regarding vaccines, Moody’s noted that Moderna Inc. as well as Pfizer Inc. and its partner BioNTech will continue to ramp up production of their COVID-19 vaccines and distribute them widely throughout 2021.

“The launch of successful vaccines creates the opportunity to improve relations with key stakeholders including patients, physicians, hospitals and health authorities,” report author and Moody’s Senior Vice President Michael Levesque tells AIS Health. “It also has the potential to improve the reputation of the companies making vaccines and potentially the industry as a whole.”

However, the vaccine race isn’t without drawbacks. Merck & Co., Inc. recently said it would discontinue two vaccine-development programs after Phase I clinical trials revealed that they produced an underwhelming immune response to the novel coronavirus, representing a major setback for the manufacturer. The Moody’s report also advised that “there remains execution risk in the scale-up [of successful vaccines] given the size of the undertaking.”

Meanwhile, “legislative and regulatory risks focused on lowering drug prices will remain elevated” for pharmaceutical firms now that Democrats have gained control of the White House and Congress, the report predicted. In particular, there might now be enough support to enact changes to the Medicare Part D program.

As for the recently finalized rule that effectively eliminated rebates in Medicare Part D — which PBMs have already challenged in court — Levesque says it’s also not particularly good for the pharmaceutical industry. “Rebates have long been used as a tool to drive market share through formulary negotiations,” he says. “Some products have market shares that benefit as a result of successful rebate strategies. Hence within any category there would likely be winners and losers if the rebate system is eliminated.”

Finally, the report predicted that the “brisk pace” of pharmaceutical sector M&A seen in late 2020 will continue in 2021, highlighting the most likely acquirers as Merck, Amgen Inc., Johnson & Johnson and Bristol-Myers Squibb.

Perspectives on Centene, UnitedHealth M&A Activities

February 4, 2021

Although 2021 has just begun, major health insurers appear to be wasting no time when it comes to spending the influx of cash that they’ve collected as a result of lower routine health care utilization during the COVID-19 pandemic, AIS Health reported.

On Jan. 4, Centene Corp. revealed that it struck a deal to purchase Magellan Health, Inc. for $2.2 billion, a transaction that promises to augment the insurer’s existing behavioral health, specialty health care and pharmacy management assets. Two days later, UnitedHealth Group said it plans to purchase the technology company Change Healthcare for approximately $13 billion in a deal that will bolster its analytics and advisory arm, OptumInsight.

Although 2021 has just begun, major health insurers appear to be wasting no time when it comes to spending the influx of cash that they’ve collected as a result of lower routine health care utilization during the COVID-19 pandemic, AIS Health reported.

On Jan. 4, Centene Corp. revealed that it struck a deal to purchase Magellan Health, Inc. for $2.2 billion, a transaction that promises to augment the insurer’s existing behavioral health, specialty health care and pharmacy management assets. Two days later, UnitedHealth Group said it plans to purchase the technology company Change Healthcare for approximately $13 billion in a deal that will bolster its analytics and advisory arm, OptumInsight.

Taken together, Centene and UnitedHealth’s moves are “really interesting and sizable transactions to kick off the new year given that the buyers were clearly going through [due] diligence during a volatile election cycle and pandemic,” observes Timothy Epple, a principal at Avalere Health.

Centene’s latest acquisition is especially timely given the news that Democrats will have control of the White House and the House of Representatives, plus a narrow majority in the Senate, Epple suggests. The election results “suddenly make that deal look even more attractive given the probable stability and growth tailwinds for government and [Affordable Care Act] markets,” he says.

Further, “while the Change transaction is riding analytic tailwinds that are somewhat party-agnostic, reduced volatility in the near-term policy outlook is a positive for M&A activity across the health care ecosystem,” Epple adds.

Wall Street analysts say the deals make strategic sense for the acquiring organizations, which have been aggressive about inorganic growth.

“We see this transaction as complementary as it builds on [UnitedHealth’s] focus and expansion of Optum, with Change’s data and analytics platform augmenting offerings within OptumInsight,” Citi analyst Ralph Giacobbe wrote in a note to investors. “We expect continued M&A from [UnitedHealth] in its efforts to continue to grow and scale its Optum segments, as we have seen over the years,” he added.

Regarding the Centene/Magellan tie-up, Oppenheimer’s Michael Wiederhorn offered an optimistic take. “Overall, we believe this deal continues Centene’s efforts to strengthen its capabilities in serving the highly complex portion of the government population,” he advised investors.

Perspectives on Surprise Medical Billing Regulation

January 21, 2021

After years of failed attempts, Congress has finally come to an agreement on a measure to end the practice of surprise medical billing, AIS Health reported.

Surprise billing, also known as balance billing, is the practice of charging patients for out-of-network procedures that insurers refuse to pay for in whole or in part. Often, patients incur these balance bills without their knowledge. The new legislation would ban providers from sending such a bill to patients, and would instead require providers to negotiate reimbursement with the patient’s insurer or submit the dispute to a binding arbitration process.

After years of failed attempts, Congress has finally come to an agreement on a measure to end the practice of surprise medical billing, AIS Health reported.

Surprise billing, also known as balance billing, is the practice of charging patients for out-of-network procedures that insurers refuse to pay for in whole or in part. Often, patients incur these balance bills without their knowledge. The new legislation would ban providers from sending such a bill to patients, and would instead require providers to negotiate reimbursement with the patient’s insurer or submit the dispute to a binding arbitration process.

Providers will have 30 days from the day of the procedure to negotiate a compromise reimbursement amount with payers. If the parties can’t agree, they must submit their preferred reimbursement amounts to an HHS-approved arbitrator, who will pick one of the two amounts.

Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy, praised the legislation as “closer to the ideal, consumer-friendly solution” than previous attempts to address the issue.

“It’s very likely that this bill reduces premiums,” says Adler, who has contributed to research that found surprise billing increases health care costs.

Insurance stakeholders are displeased that surprise bills will be resolved through arbitration. Instead of arbitration, America’s Health Insurance Plans had lobbied for out-of-network reimbursement to be tied to a benchmark rate.

Adler thinks that insurers’ objections to arbitration are overblown, and he argues carriers will gain leverage in balance billing negotiations because of the legislation.

“It seems pretty easy for an insurer or a [plan sponsor] company to call a provider’s bluff,” Adler says, citing rules in the bill that he thinks will prevent providers from abusing the arbitration system.

Dan Mendelson, founder of Avalere Health, is more skeptical about the bill’s potential to reduce costs and slow premium inflation, since it will require new administrative costs.

“There is no question that whenever you force more cost into the system, it’s going to be reflected in consumer cost,” Mendelson explains. “So there will be a premium effect. Will people actually be able to differentiate it from the typical rise in costs? No….I do expect that it will have an effect, just from an economics standpoint.”

Perspectives on New-to-Market Oral Drugs

January 7, 2021

In its latest quarterly Drug Pipeline Insights Report, OptumRx includes a diverse array of medications that the UnitedHealth Group-owned PBM believes are likely to make a market impact when they’re approved by the FDA, AIS Health reported. One interesting trend that applies to three of the five highlighted drugs is the fact that each is the first oral option in its respective category.

While oral medications tend to be thought of as more convenient than injectable or IV-administered therapies, that factor alone may not confer as much of a competitive advantage as one might think, according to one OptumRx executive.

In its latest quarterly Drug Pipeline Insights Report, OptumRx includes a diverse array of medications that the UnitedHealth Group-owned PBM believes are likely to make a market impact when they’re approved by the FDA, AIS Health reported. One interesting trend that applies to three of the five highlighted drugs is the fact that each is the first oral option in its respective category.

While oral medications tend to be thought of as more convenient than injectable or IV-administered therapies, that factor alone may not confer as much of a competitive advantage as one might think, according to one OptumRx executive.

Take roxadustat, which if approved would be the first novel therapy for chronic kidney disease-related anemia since 1989 and would offer an oral alternative to the injectable erythropoiesis-stimulating agents (ESAs) currently being used to treat the condition.

“Dialysis-dependent patients usually get their ESAs administered with dialysis via IV infusion, so the oral alternative in these patients doesn’t provide a convenience benefit necessarily,” says Bill Dreitlein, senior director of pipeline and drug surveillance at OptumRx. “However, there may be alternative benefits around safety.”

Then there’s Orladeyo (berotralstat), BioCryst Pharmaceuticals, Inc.’s treatment for hereditary angioedema (HAE) attacks. When the FDA approved Orladeyo on Dec. 3, it became the first oral plasma kallikrein inhibitor for the prevention of HAE attacks, Dreitlein says.

“The convenience benefit for berotralstat would have been more significant,” he says, but the 2018 approval of approval of Takhzyro, which is subcutaneously administered every two to four weeks and can be self-administered, “diminishes that because it already reduced the number of injections vs. older C1 concentrate products.”

The FDA on Dec. 18 approved relugolix, the first oral GnRH receptor antagonist on the market for advanced prostate cancer.

Relugolix’s oral administration gives it an advantage over Firmagon (degarelix), which requires monthly subcutaneous injections by a health care provider “and hasn’t garnered much commercial success because of the frequent injections and injection site reactions,” Dreitlein says.

The more common GnRH receptor agonists, on the other hand, require intramuscular injections at intervals ranging from one to six months. “Compared to these drugs, relugolix might confer some clinical advantages, but the convenience benefit is reduced because you are replacing an injection given potentially every six months with an oral daily medication,” Dreitlein adds.