How Trumps First 100 Days Affected the Healthcare Industry

By Todd Campbell and Kristine Harjes Markets Fool.com

Plans to repeal and replace Obamacare weighed heavily on insurers ahead of Donald Trump's presidency,so now that he's been in office for 100 days, it's time to check in and see how these companies are doing.

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On this episode of The Motley Fool's Industry Focus: Healthcare podcast,analyst Kristine Harjes and contributor Todd Campbell sit down to discussUnitedHealth Group Inc.(NYSE: UNH),Anthem Inc.(NYSE: ANTM), andCentene Corp.'s (NYSE: CNC) first-quarter performance, and what could be next for these companies.

On the show, the cast also weighs in on an increasingly heated battle between healthcare giants Anthem andExpress Scripts(NASDAQ: ESRX), and they discussFresenius'(NYSE: FMS) recent acquisition ofAkorn(NASDAQ: AKRX), too.

A full transcript follows the video.

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This video was recorded on April 26, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today's sector is healthcare, and it isApril 26.I'm your host, Kristine Harjes,and fool.com healthcare contributor Todd Campbell is calling in to Fool HQ in Alexandria, Va. Hi, Todd! What's new?

Todd Campbell:
Hi, Kristine. It's Wednesday, and that means Igive all of the listeners theupdate on the weather forecast for lovely New Hampshire.

Harjes:
[laughs] All right, let's hear it.

Campbell:
Rainy,cloudy, and chilly. It'sbasically the worst weather that you could ever want forsomeone in New Hampshire who'sso eager to see some sunshine andget the warm weather going. But it's theperfect day to sit down and chat with you.

Harjes: Fun fact about D.C. weather today: It's supposed to be the warmest at midnight, because it's going to be so darn hot tomorrow that it's going to get warmer and warmer all day today, so the high is at 11:59 p.m.

Campbell:
That is a fun fact.

Harjes:
There you have it, the weather report. And now, on to healthcare. On today's show, we'll be covering pharmacy benefit managers and also look at how insurers have faredunder the first 100 days of Trump'spresidency. But first, wewanted to give a quick answer forShiraz,one of our listeners who iscurrently stationed in Tokyo, whowanted us to cover theFreseniusandAkorndeal. I hope that I'm saying that word right, Fresenius, which is a German healthcare giant. They acquired this smaller drugmaker called Akorn yesterday in a $4.3 billion deal.

Campbell:
Fresenius is very well known to manyif you've driven by and seen theirdialysis centers. It's avery large European company, but they get 70%-plus of their saleshere in North America, andthey get the bulk of all the revenue byproviding these services todialysis patients. What we'reseeing them do recentlyin the last year or so, they have a new CEO in place who'svery focused on diversifying out his revenue streams.Specifically, he wants to bulk up onhis exposure to medicine. Aspart of that, he has agreed to spend $4.3 billion on Akorn, plus assumed debt. That works out to about $34 a share.

Harjes:
Right. Therea couple different reasons why they're doing this. As you mentioned, this is a company that'slooking to expand. They've had a bunch ofdifferent deals around Europe, and this buyout will actuallyexpand their geographical footprint within the U.S. as well,particularly because it gives them access to Akorn's distribution channels. The deal issupposed to be accretive to net income by 2018. This has beenreally good news for Akorn shareholders.

Campbell:
Yeah,there's a huge pop in sharesbecause this was a nice, big, fat premium. One of the things that always comes upwhen you talk about deals like this is,do you think there could be another suitor that could emerge? Should I stay in my Akorn shares, or should I sell them? Youhave to realize that this is an international company buying Akorn; there's going to be some review that needs to occur from a regulatoryperspective. The deal probably won't close until 2018. Personally, who knows ifsomebody else steps up and tries to make a counter-bid? I don't think the odds arenecessarily high for that, and I tend to always advise people to say no. Usually, it's dead money. This is not a stock deal.I think Fresenius said they're going to finance it by taking on some debt. It's not like you're goingto hang on and eventually get the Fresenius shares, it doesn't sound like, to me, reading through the press releases. I think your money is probably best used somewhere else because of the opportunity cost.

Harjes:
Right. There couldpotentially be some triage opportunity, I think shares today are a little bit over $33. But that's not worth it to wait until 2018, to gainless than $1 per share. So the way that I see this,I agree with you, Todd,I don't think anyone else isgoing to swoop in here. There has beenspeculation about this deal for quite a while. Andactually, the majority of the pop in the stock happened when the rumors were leaked, rather than theconfirmation, which came out yesterday.I don't see somebody else stepping in here andmaking an even bigger offer. If that does happen,I will be quite surprised. If I were a shareholder,I would probably just collect my cash now and exit,put your money to work elsewhere.

Campbell:
It'sprobably a better bet, Kristine, to take a look at Fresenius shares. That's a company that's growing high singledigits on the top line and the bottom line. Obviously, it's being run by someonewho is expansion focused,focused on growing the company. Usually, these foreign companiesfly a little bit underneath the radar for investors. So sometimes there can be opportunities in looking at these companiesthat are a little bit more underfollowed thansome of the big names that we're more familiar with in the U.S.

Harjes: Right,plus you get that international diversification, which ishelpful if you want to be fully diversified. Good advice.

I mentionedright at the beginning of the show thatat some point, we were going to talk aboutpharmacy benefit managers, which are also PBMs -- we'llprobably refer to them exclusively by the acronym. That time is now. We have some news to dig intoregarding one of the nation's major PBMs, but first, I figurewe should give some background on what exactly is a PBM?

Campbell:
To keep it very top leveland make it very easy to understand, each one of these payers, insurers, or it could be a company that self-insures theiremployees,has to go out individually and negotiate with drugmakers on pricing. That'snot very efficient. You'renot likely to get the best deal, because you don't have a lot of bargaining power. So what PBMs do isallow a lot of different insurers and different payers to bondtogether under this umbrella, and they'llnegotiate the best price for you, pass along that savings to you, andtake a small piece for themselves.

Harjes:
Right. They'rebasically leveraging their size totry to get prices down, and they take a cut of those savings. Because of that, they've beenpainted in a sketchy lightlately, especially by drugmakers, saying, "We're not responsible forastronomical drug prices; it's actually the PBMs." I don't know,I think they've been kind of successful intainting the reputation of PBMs. Thatmight not even be the right way to phrase it,because I don't think they had a reputationbefore people really started thinking about this issue.

Campbell:
Yeah, Kristine,I think a few years ago, they were being looked at aspart of the solution. I think the drug industry haspainted them now as part of the problem, andthey've done a pretty good job marketing that to individuals.

Harjes: Yeah. It'sinteresting. Personally, I don't know what my opinion is on whether they're good guys or not, but I think it's important to understand that they are part of this whole relationship, and they're just one more cog in the wheel, they're one more piece of this puzzle, and they're going to take a cut. So they are part of the equation of why drug prices are the way they are, for better or for worse.

Campbell:
Yeah. The argument would be that they have to save you more, and they're only taking a cut of what those savings would be, so if they didn't exist, the cost would be higher. That would be the counter-argument, and the value they add. But maybe the value they're addingisn't as great as it sounds, at least according to Anthem.

Harjes:
Exactly. That brings us to the news-y part of the segment,and why we wanted to address this to begin with.Express Scripts, which isone of the major United States PBMs,lost about 12% of their stock priceyesterday, Tuesday, on the news thatAnthem, which is one of the big health insurers, is notplanning on renewing its contracts that it had withExpress Scriptswhen they get to their expiration in 2019.

Campbell:
This is an ongoing battle between Anthem andExpress Scripts that's been going on more than a year.

Harjes: Yeah. It was the very first thing that Express Scripts addressed in their earnings call. They basically said, "This is the latest on this deal, Anthem has signaled to us that there is no way we can reach a compromise, so they're not going to renew their contracts." Express Scripts, to their credit, wasextremely transparent about exactly what will happenfinancially when/if theylose this as well as some other big clients. Anthem, in general, has been verypushy about demanding things from Express Scripts. They wantExpress Scripts to give them $3 billion a yearin order to keep this contract. WhenExpress Scripts opened up their books and said, "Look,this is how much money we're making from this deal,this is what you're asking for," it just wasn'tpossible to make those ends meet.

Campbell:
Yeah. This all beganback in 2009, when Anthem sold theirinternal PBM business toExpress Scripts and, at the time, inked a 10-year deal forExpress Scripts to handle this part of the business for them.

Harjes:
Right, hence the2019 expiration.

Campbell:
Yeah. Aspart of that language, they were supposed to be able to get someprice rebating backat the end of the year. They had been projecting that to be a fairly large sum. Last year, Anthem came out and said, "Listen, we thinkExpress Scripts is charging us $3 billion a year too much forthe drug that it's handling. They'renot passing those savings along to us thatthey have promised to pass along." Shortly thereafter, Anthem filed a lawsuit, saying to Express Scripts, "Either pay up or we're going to walk away. Give us the option, either or." Obviously, the twocould not find a middle ground on this, and that's what promptedExpress Scripts, finally, to say on their earnings call, "Listen,they told us they'renot going to renew in 2019, and that means we'regoing to lose a big chunk of our EBITDA." Toput that in perspective forinvestors on why this wassuch a big deal and caused shares to plummet, last year, Anthem's businessrepresented almost a third ofExpress Scripts' EBITDA. So this isvery substantial, their biggest customer, verysubstantial part of the business. No wonderinvestors were like, "Oh my God,what's going on, what's going to happen in a few years?"

Harjes: Right.Express Scripts' stock hassuffered pretty considerably because of this. They're down about 30% since the fighting with Anthem began. If youlook at the aftermath and what'sactually going to happen, it'll take a little bit of timeto be fully felt. WhenAnthem first came to Express Scripts, back in 2009, as you were saying, it took three full years for thetransition. Even post-2019, theimpact won't be immediate. But still, it will bereally difficult to replace this business. I can't imagine what other health insurerExpress Scripts might try to forge a deal to replace what they'relosing with Anthem. You haveUnitedHealthcare, that's a huge insurer, but they have their ownPBM.Humanahas its own,Cignahas a 10-year contract withCatamaran,which was acquired by UNH. Then,Aetnahas a contract with [CVS Health], which also has a PBM thatexpires in 2019. So that could bekind of interesting.

Campbell:
Yeah, this is an area where there arealways companies in payers moving back and forth,but it's usually not the big ones. It's usually not the players like Anthem.

Harjes:
Right,because they're long-term contracts.

Campbell:
Yeah. Now, I think you mightlook at the shares today,if you're listening to this on the day we record here, and say, "But shares are up." That'sbecause there was some conversation on Anthem'sinvestor call today thatindicated that maybe the door was still open for somenegotiation. Obviously,Express Scripts doesn't want to give Anthemall the money that Anthem wants, Anthem seems to want that money,I don't know where they would find a middle ground. But it's giving a little bit ofsupport after that big drop in shares today, at least.

Harjes: Right.Express Scripts has made it very clear that they'restill willing to negotiate. It seems like Anthem is playing hardball here, butI honestly wouldn't be shocked if Anthemended up finding some way to compromise.

Campbell:
One of the takeaways here, Kristine, for investors should be,always be a little bit cautious whenone customer accounts for a very big percentage of a company's business. Right?

Harjes:
Absolutely, that's a great takeaway. Thatsinglerisk factor is not something to be discounted.

Campbell:
Now,that doesn't mean that you can't go in andmake some money on Express Scripts.I think there's still a need for abusiness like Express Scripts. The debate would be, is Express Scripts the biggest player in the PBM business? Or the best player,I should say,from here in the PBM business? Maybe CVS is the best player because they have the most gain.

Harjes: Yeah. If CVS won Anthem,that would certainly make them the biggest PBM.

Campbell:
Yeah. Youalso have the potential for UnitedHealthcare, which isobviously a lot more diversified because it runs its own PBM,but it'salso the largest health insurer as well. Aninvestor might not want to own a PBM and a separate health insurer in their portfolio, they want a combination of the two, thenUnitedHealthcare fits the bill in that way.

Harjes:
Right,lots of different ways to work that. We covered the PBM side. Let's pivot now to the insurer side. Todd,this was your idea, you wanted to talk about post-100 days of Trump, we'recoming up on it, it's in less than a week at this point. How are the major health insurers doing?

Campbell:
We're on Trump-100-day-watch,and we want to know what the impact is on insurers. We came into 2017expecting that there would be arepeal-and-replacement dealput forth in Washington. I was a little surprised thatit happened as quickly as it did. But sure enough, things are hard to do when you're talking about winningsupport from so many different people in both the House and,potentially, later on, in the Senate. As a result, that derailed Trump's first foray to try and repeal and replace. That wascalled the American Health Care Act, which you and I, Kristine, discussed at some length in a showa couple of months back,if anybody wants to go back and listen to that. Obviously, aspart of Trump's policy agenda,health insurance was going to be a huge part of that. So I thought it might be helpful to go back and say we're one quarter in, Q1 in the books -- how did health insurers do? Was there any evidence that Trump'selection was a good or bad thing? Or is it just business as usual?

Harjes: Right. Let's start, first off, with UnitedHealthcare, who we'vealready mentioned a little bit on this show today, that they are anenormous health insurer in the United States. They'rekind of an interesting case because they basicallyopted out of Obamacare by saying, "We'renot making any money here, so we'd rather not; no, thanks." Thatput them in kind of an interesting position looking at healthcare reform,because you would think thatbecause of their lack of exposure to Obamacareit wouldn't really affect them much whetherObamacare was repealed and replaced or not. How did that end up panning out?

Campbell:
It's all upside for UnitedHealth; think about it that way. They were losing money on theObamacare plans, so they stoppedselling them. That brings some back to flat. Now, if areplacement plan gets put in and,theoretically, it becomes morefavorable to insurers --which, I think, broadly speaking, people were anticipating that it would be moreprofitable for insurers, because you need to have insurers play ballin order to have any kind of a system succeed. So I think there was a potential for a lot of upside. Butit's really just business as usual for UnitedHealthcare in Q1. This is,like you mentioned, a Goliath. They're expected to do $200 billion in revenue this year. If you look at their Q1 numbers,premiums alone were up 12% to $39 billion. They made12% more on premiums year over year in the quarter. Of course,that translated into earnings growth, too. You had non-GAAP EPS that wasreported in the quarter of $2.37. That was up 31%. So you have earnings growing much more quickly than revenue, and both of them growing solidly in the double digits.

Harjes:
Right. As you mentioned, UnitedHealth is extremely diversified; they are huge. Let'slook at the other side of the spectrum there, at a more niche player likeCentene, who is mostly a Medicaid player.

Campbell:
Centene is an interesting story, too. If the replacement plan had been put into place, then you'd be wondering, what's going to happen withMedicaid expansionstates? Centenegets the majority of its business fromrunning Medicaid programs for different states. Part of the replacement plan was to cap enrollment inMedicaid expansion states in 2020, and block-grant money to states from there on,which would create a significant amount ofuncertainty for their business. Again,since this is on hold, it's business as usual for the company. Theyreported strong revenue growth,but again, that's a little messy,because they did an acquisition last year. So it's probably better to look at their EPS growth. In the quarter, theirearnings growth was up 51%; they reported $1.12 in non-GAAP EPS. So this is a company, obviously, that'smaking some money. It's important to recognize thatnot only are they interesting, at a minimum, torecognize that UnitedHealthcare has said, "Wedon't want to have any part of Obamacare," Centene has said, "Wethink it's a good business to be in. In fact, we're looking to expand ourparticipation in it in 2018,assuming thateverything continues as is." They handle about 1.1 millionObamacare enrollees, and that's up from around 680,000 last year.

Harjes: Twocompletely different approaches. Let'stouch on one more. I'm picking them because we were just talking about them in the PBM section. How about Anthem?

Campbell:
Anthemjust reported this morning. Unfortunately, I wasn't able to listen to the conference call yet. It'son my agenda for later on. ButI did go through and tear through the press release. Again, like UnitedHealthcare --UnitedHealthcare is the biggest,Anthem is the second biggest --everything seems to be going well. Anthem stillparticipates in Obamacare; they offer plans in a dozen or so states. They reported total revenue was up 11% to $22.5 billion. Strong, double-digit year-over-year growth again. Their non-GAAP EPS in the quarter was $4.68, which was up 35% year over year. So regardless of all of the otherchatter that we hear aboutObamacare, not Obamacare, whatever, you look at UnitedHealthcare's results and Anthem's results, and from agrowth perspective on a top and bottom line, they'rekind of comparable. Itdoesn't seem like not participating orparticipating is really that big of a needle mover,in terms of how much these companies are growing year over year.

Harjes:
Yeah,that's interesting. One other point thatstood out to me when I was looking at this,I was looking earlier today atdifferent lobbying budget across healthcare.America's Health Insurance Plans, a lobbying company,decreased their budgetgoing from 2016 to 2017, which really stood outin contrast to what some other healthcare lobbyists were doing. That was a 25% decline in theirbudget. Of the top 25 spenders in that area, they were one of just four to cut their budgets. This is a grouprepresents Anthem, Cigna,Centene, Humana. I don't know,I just think it's a really interesting dynamic,to see what's going on in Washington,how are the different lobbyists reacting to it,how are the different insurers reacting to it, and how are thestock prices reacting to it? This isabsolutely still something that remains in limbo, but it's still fun to tease of theeffects of the chatter.

Campbell:
Yeah. Ofall of these companies we discussed today,if you want to go back and read one earnings transcript for interest, go read Centene's,because they really put this front and center and talked a lot about Obamacare, and how toughit might be, or, the challenges that might be, to unwind it and get a replacement planacross the finish line. This is notgoing to be easy. The AHCA, theydidn't vote on it yet, there's a lot of chatter that it may be brought back out in front oflegislators to vote on. Who knowshow that middle ground will be found in the House,and then it's going to go to the Senate, andmiddle ground has to be found there. I don't know. I think the point that Centene's management was trying to make is, we're ready toadapt to whatever the market throws at us. As it stands today, we're OK andwe're doing fine. If it changes, we'll adapt to it.I think that's a big takeaway forinvestors. Never underestimate insurance companies'ability to adapt to a changing marketplace.

Harjes: So they'reoptimistic. Whatever does happen, we will have you covered here on Industry Focus: Healthcare. Aswe wrap up our episode,I wanted to point out that you can always get the show transcriptsof our episodes online by searching for that episode, orif you can't find it that way, feel free to email me at industryfocus@fool.com. I must have mumbled the name ofPacira Pharmaceuticalslast week onthe opioid-addiction show, because a bunch of you wrote inasking me what the company name was. In case you didn't hear it but also didn't email me, the ticker is PCRX. Hopefully that scratches that curiosity itch.

Asalways, people on the programmay have interestsin the stocks that they talk about,and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of Express Scripts. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.