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With Congress ratcheting down saber-rattling over broader healthcare reforms into 2024, Morgan Stanley has taken a extra constructive view on the managed care and retail pharmacy house, primarily because of the biosimilar/GLP-1 alternative.
Nevertheless, the analysts led by Erin Wright highlighted the implications of rising healthcare utilization charges and cited the alternatives/ dangers associated to the upcoming superior 2025 Medicare Benefit fee discover.
Regardless of value developments as seen with rising utilization charges into 2024, “election cycle threat may also be entrance and heart,” MS analysts wrote, issuing their 2024 outlook for healthcare providers.
Election threat
MS pointed to the sector’s underperformance this 12 months, noting that managed care organizations dropped 15% whereas pharmacies fell 49% YTD. Based on the agency, managed care organizations have traditionally shed a median of ~31% in the course of the previous six election cycles till a mid-March trough.
Nevertheless, after the poll, managed care has traditionally outperformed the S&P 500, resulting in a median relative outperformance of ~12% and ~20% over the six and 12 months following the election day, respectively.
In comparison with earlier elections, the agency cites a scarcity of help amongst lawmakers for broader healthcare reforms, or Medicare for All. “President Biden declaring a run for reelection largely derisked Medicare for All as an overhang by preserving extra progressive Democrats on the sidelines,” MS analysts added.
“Whereas previous expertise tells us to keep away from managed care into US presidential elections, we really view it will likely be a comparatively benign cycle from a healthcare perspective,” the analysts wrote, noting that proudly owning MCO shares this 12 months forward of potential troughs “will not be as punitive, if in any respect.”
GLP-1/biosimilar alternative
The agency highlights Pharma Profit Managers as a key MCO theme within the sector, noting their potential to profit from the GLP-1 class of weight reduction medicine and biosimilars.
Regardless of regulatory headwinds, Morgan Stanley sees worth and progress prospects within the PBM house. The group appearing as intermediaries between well being plans, pharmaceutical producers, and pharmacies has lately come below intense congressional scrutiny over their function in rising healthcare prices.
MS additionally initiatives PBM’s potential to profit from GLP-1 medicine, a brand new class of weight problems medicine marketed by Eli Lilly (LLY) and Novo Nordisk (NVO) (OTCPK:NONOF).
Based on the agency, the rising demand for GLP-1s can enhance the 2024E and 2025E EPS of three main PBMs, particularly the Caremark unit of CVS (CVS), UnitedHealth’s (NYSE:UNH) OptumRx, and Cigna’s (NYSE:CI) Evernorth, by ~26 bps–~307 bps and ~13 bps–~163 bps, respectively.
There can be further alternatives from the tip of U.S. market exclusivity for AbbVie’s (ABBV) blockbuster arthritis drug Humira, given the $38B market dimension and upcoming biosimilars, together with ones with interchangeable designations.
In January, Amgen (AMGN) launched its Humira biosimilar, Amjevita, the primary of many off-patent variations launched within the U.S. towards the bestselling injectable this 12 months.
Rising healthcare utilization
Moreover, Morgan Stanley pointed to rising value developments within the MCO house after UNH mentioned in June that the corporate’s medical care ratio, the portion of premiums spent on healthcare prices, will come below stress amid a post-COVID spike in medical exercise.
Whereas increased healthcare utilization, a key investor concern in 2023, “will stay elevated into 2024, it’s encouragingly not worsening, a dynamic that we’ll monitor however is appropriately embedded in expectations for MCOs,” the analysts opined.
MA superior fee discover
Commenting on the 2025 Medicare Benefit superior fee discover anticipated in late January or early February, the analysts argued that MCOs have been bracing for a post-pandemic normalization within the fee surroundings.
MS estimated that the MA superior fee discover for the 2025 calendar 12 months might come at +0.2%, according to the pre-pandemic ranges. The analysts additionally wrote that any weak spot in MCO shares following the announcement can be a compelling shopping for alternative.
In current historical past, 2022 and 2023 noticed the most important hikes to Medicare Benefit ultimate charges earlier than the 2024 ultimate fee got here flat.
Medicaid redeterminations
MS thinks that the continued Medicaid eligibility opinions, which it expects to proceed till at the very least 2024, can be among the many key MCO themes to be careful for subsequent 12 months.
The analysts argue that business insurer Cigna (CI) will change into a significant beneficiary of the continued redeterminations, which resumed in April after a pandemic-era pause up to now few years.
“CI doesn’t take part in MDCD managed care packages and MDCD redeterminations represents an upside alternative for its business/employer sponsored plans and the alternate market which isn’t presently embedded into steerage,” the analysts wrote.
Rankings
The Bloomfield, Connecticut-based firm is a key Chubby for MS on its biosimilar alternative and minority funding in healthcare supplier VillageMD, which is majority-owned by Walgreens (NASDAQ:WBA). Its value for CI stands at $365 per share.
Nevertheless, Walgreens (WBA) has change into a key Underweight for MS, and its value goal, adjusted to $22 from $27, displays a softer progress outlook for FY24. The agency cites macro challenges, decrease COVID-19 vaccine and check volumes, a weaker respiratory season, and ongoing adjustments to the corporate’s retail footprint as causes for its bearish outlook.
Given its scale and diversification, UnitedHealth (UNH) was topped Morgan Stanley’s high decide within the MCO house. Citing its progress prospects and diversified enterprise mannequin, the agency raised UNH’s value goal to $618 from $579 per share with an Chubby ranking.
Different listed MCOs embrace Centene (CNC), CVS Well being (CVS), Elevance Well being (ELV), Humana (HUM), Molina Healthcare (MOH), Alignment Healthcare (ALHC), and Clover Well being Investments (CLOV).
