What You Should Know:
– Given high inflation rates, costs for traveling nurses, and light volumes in 2Q:22, he is cautious on stocks that sell into the acute care market in the near term.
According to the report, there are many macro headwinds that continue to affect the HCIT sector and the broader market, including inflationary pricing pressures, supply chain challenges, the Russia-Ukraine war, and COVID.
Some of the key factors are elucidated as follows:
1. Inflation is still high. Inflation is very real, spiking to ~9.1% in June 2022, which is above May’s 8.6% figure, and is a 40-year high. In our HCIT coverage group, company such as Cryoport (CYRX, Buy, $60 PT) and Omnicell (OMCL, Buy, $175 PT) rely on raw materials such as semiconductors, freight, and steel for their solutions. While both these companies have implemented pricing measures to manage costs more effectively, inflation could continue to put margin pressure on these businesses. Wage inflation for nurses and hospitals are high, which is pressuring hospital margins.
2. COVID has caused light volumes in 2Q:22 but a spike in volumes in June. In terms of COVID, while analysts don’t expect another massive COVID surge from Delta or Omicron, which caused significant spikes in both case rates and hospitalizations, the BA.5 COVID variant continues to gain prevalence, which could cause another spike in COVID in 2H:22. We believe that volumes in hospitals are light in 2Q:22 mainly because of delayed elective procedures.
3. Hospital Cap-Ex is under pressure in 2Q:22. Given light volumes in 2Q:22 and high inflation costs, analysts believe that hospital capex is under pressure in 2Q:22. This could cause elongated demand cycles for Omnicell (OMCL, Buy, PT $175) and Health Catalyst (HCAT, Buy, PT $25).
4. The U.S. Healthcare System also continues its push to value-based care (VBC) and risk-based deals, and at- risk groups may benefit from light volumes in 2Q:22. The Center for Medicare and Medicaid Services (CMS) is leading the charge in value-based-care, with recent updates, including the CY 2023 Medicare Advantage Rate Notice to its CY 2023 Physician Fee Schedule (PFS) Proposed Rule. CMS’ VBC initiatives highlights CMS’ commitment to get all traditional Medicare beneficiaries and the vast majority of Medicaid beneficiaries into an accountable care relationship by 2030. Companies that are highly aligned with CMS’ and its customers’ VBC initiatives, and that profitably take and succeed in risk-based deals will succeed in this market, which includes companies like Evolent Health (EVH, Buy, $45 PT), Privia Health (PRVA, Buy, $39 PT) and agilon health (AGL, Neutral). Companies that have tech-enabled healthcare solutions that are based on VBC principles with business models that emphasize both growth through high-quality, highly recurring revenue streams and earnings that are able to meaningfully expand their margins will succeed in this market.
5. M&A activity is very significant in the space. Another consideration is that M&A activity in the HCIT coverage universe is very real as evidenced by Amazon’s (AMZN, NR) recently proposed acquisition of One Medical (ONEM, Neutral) on 7/21/22.. Solutions in HCIT companies are valuable both to larger healthcare enterprises and non-traditional conglomerates that are entering the healthcare space.
Stocks That Look Good Ahead of 2Q:22 Results
According to Larsen and his team of analysts, the following are the healthcare IT stocks, and the reasons they look good ahead of the 2Q:22 results:
1. Evoke the Health: EVH is one of the top picks in 2H:22 and was also listed as one of the top 10 picks with additional technical analysis. Analysts like EVH’s healthcare offering across its clinical and technology solutions, which is highly aligned on VBC principles. EVH continues to enhances its value proposition through new client wins and additional product offerings. EVH has multiple growth opportunities across the business, and especially in its NCH business including a $4B top-line potential opportunity if EVH can sell into ~25% of the members of its five largest NCH customers, most of the $75M revenue lift from EVH’s Molina (MOH, NR) contract is still to be recognized in F2022, and continuing to transition its customers from its Tech and Services Suite with PMPMs of $0.38 to its Performance Suite with PMPMs of over $20+.
2. Privia Health: PRVA is a VBC industry leader that works with healthcare stakeholders across the spectrum from medical groups, health plans, and health systems to optimize physician practices, improve patient experience and satisfaction, and increase provider compensation for delivering high-quality care across in-person and virtual care settings. PRVA’s healthcare model, which is based on VBC principles has enabled healthcare entities to transition to VBC, decrease administrative burden on healthcare practices, and utilize its user-friendly technology platform, which is based on athenahealth’s (Private) EMR and collector solution, that has advanced capabilities that enhance clinical care delivery. As the market continues its shift to VBC, analysts believe PRVA is well-positioned to continue to grow profitably and take market share as it expands into new markets.
3. Cryoport: CYRX is an industry leader for its cryogenic logistics solutions and services. CYRX has a significant runway for growth as more commercial CAR-T therapies continue to be approved by global regulatory agencies such as the FDA and EMA for an expanded range of conditions, allogeneic therapies continue to gain traction, which are more scalable, efficient, and effective in providing time-sensitive treatments to patients versus autologous therapies, and CMS continues to increase base- rate reimbursement related to CAR-T therapies.
4. UnitedHealth Group: UNH reported a solid quarter in which revenues and adjusted operating income were both ahead of FactSet Consensus estimates and F2022 adjusted EPS was increased for the year. UNH saw double digit growth in both its Optum and UnitedHealthcare business segments. Much of UNH’s growth in its Optum segment was driven by growth in its Optum Health Revenue, which grew +32% y/y in 2Q:22 led by growth in patients under VBC arrangements. Optum now expects to serve 600K new patients in VBC arrangements in F2022, which is up from in its initial outlook of 500K. UNH continues to expand its care services offered from at-home and digital offerings that complement its clinic-based and outpatient services, including ambulatory surgical care. UNH is one of the largest health plans in the country, and its embrace of VBC is promising for companies in our HCIT coverage universe that are highly aligned with VBC principles, including EVH, PRVA, and AGL.
5. Walgreens: Walgreens reported a largely in-line quarter in F3Q:22 in which WBA’s F3Q:22 revenue of $32.6B (-4% y/y) was above the mean of $32.1B and its adjusted operating income of $955M (-35% y/y) versus the mean of $932M. Walgreens continues to face numerous headwinds across the business, including in its AllianceRx business, increasing competition in its specialty and home delivery pharmacies businesses, the decline in vaccinations, ongoing reimbursement pressures, and the 340B program as well as macro headwinds from wage inflation and other inflationary pricing pressures. Walgreens’ results show that it is “tough sledding” in the retail pharmacy space and highlights the tough pharmacy services macro environment. Headwinds in the 340B program could adversely affect OMCL. Walgreens is also seeing good growth from its Walgreens Health business segment. F3Q:22 sales were $596M in the quarter from VillageMD ($511M; +69% y/y) and Shields Health ($85M; +47% y/y). VillageMD has 315 clinics as of the end of F3Q:22 in which 120 are co-located within Walgreens’ pharmacies. Walgreens seems to have big plans and with new strategies in Walgreens Health, including extending its primary care network. Walgreens Health seems to be growing rapidly, which bodes well for continued adoption of solutions in our HCIT coverage group.
6. Elevance: Elevance (formerly Anthem) reported F2Q:22 revenue of $38.6B (+14% y/y), which was ahead of FactSet Consensus estimates of $37.9B and its operating income of $2.4B (+14% y/y), was behind consensus of $2.5B. ELV also increased its F2022 adjusted EPS guidance from greater than $28.40 to greater than $28.70. ELV highlighted headwinds from COVID and non-COVID utilization on the Commercial business during the call. ELV remains focused on building out its digital organization and digital platform as it continues to build out its digital connectivity that furthers its patient-centric care approach. According to analysts, ELV is a forward- looking health plan with an innovative digital health solution. As health plans look to expand and extend their digital capabilities, this should drive demand for solutions in our HCIT coverage group.
7. Tenet Healthcare: THC experienced an improvement, relative to pre-COVID baseline, from 1Q:22 to 2Q:22, for admissions, outpatient visits, emergency room (ER) visits, and hospital surgeries. However, these figures were down from 4Q:21, we think due to the Omicron surge. United Surgical Partners International (USPI) surgical cases or outpatient surgery cases remained ~flat in 2Q;22 from 1Q:22, based on surgeries as a percentage of baseline.THC continues to balance meeting volumes and managing costs despite a difficult environment in terms of wage inflation and contract labor rates and utilization. THC continues to focus on adding back high acuity volumes in surgical and procedure-based areas while employing financial discipline across the business. THC has been very thoughtful and deliberate regarding capacity management by prioritizing maintaining open access, ensuring that its high acuity strategy remains a focus, and continuing to expand margins through efficient staffing to effectively manage and control staffing costs.