Mad Hedge Biotech and Healthcare Letter
December 10, 2024
Fiat Lux
Featured Trade:
(THE INSURANCE COMPANY ALWAYS RINGS TWICE)
(UNH), (CI), (CVS), (HUM), (AMGN), (BIIB), (GILD)
Posts
Got an interesting call yesterday from an old college buddy - let's call him Bob. We go way back to our UCLA days, before I headed to Tokyo and he went into tech.
He was fuming because UnitedHealth (UNH) just denied his family's third claim this year, something about an "experimental treatment" for his daughter's rare condition.
Coming from a guy who just cashed out of his third startup, hearing him rant about insurance bureaucracy was pretty rich.
Still, his situation got me thinking. After hanging up, I dug into what's really happening with insurance stocks, and the picture isn't pretty.
UnitedHealth Group, our nation's biggest health insurer, just had its worst week in years - dropping 9.5% after one of their executives was tragically murdered, which sparked an unexpected spotlight on their claims practices.
Cigna (CI) and CVS Health (CVS) caught the same downdraft, falling 4.5% and 5% respectively.
But here's what really caught my attention: UnitedHealthcare's denial rate for Medicare Advantage claims has more than doubled since 2020, hitting 22.7% last year.
Interestingly, this spike happened right as they rolled out new automation processes. Funny how that works, isn't it?
Experian Health's latest report shows this isn't isolated - 73% of healthcare providers are reporting more denials than ever, with processing times stretching longer and longer.
The cost of this trend? The Council for Affordable Quality Healthcare estimates $31 billion annually in administrative expenses alone.
Meanwhile, biotech companies find themselves in an awkward position. They're developing treatments that cost more than a house in the Hamptons and then need these very same insurers to make them accessible.
Amgen's (AMGN) been crushing it with their human therapeutics portfolio, pulling in $28.2 billion in revenue last year.
Biogen's (BIIB) making serious moves in neurological treatments, though their path has been rockier - just ask anyone who followed the Aduhelm saga.
Gilead Sciences (GILD), our antiviral champions, have managed to stay above the fray, partly because their HIV and hepatitis treatments have become standard of care.
But even these giants must wonder:: as insurers tighten their prior authorization screws, what happens to patient access?
These biotechs spend billions developing breakthrough treatments - Amgen alone dropped $4.4 billion on R&D last year - only to face the insurance industry's equivalent of "computer says no."
The irony isn't lost on anyone: insurers need innovative treatments to justify their premiums, while biotech needs insurance coverage to justify their R&D spending.
It's a delicate dance that's worked reasonably well so far, but these rising denial rates have everyone on edge. Just last quarter, we saw several biotech earnings calls dominated by questions about insurance coverage rather than clinical trials.
So what should we do? Well, I say UnitedHealth and Cigna are "holds" right now - the current turbulence needs time to settle.
CVS Health is showing broader operational challenges that suggest it might be wise to consider selling. But Humana (HUM), with their strong Medicare Advantage presence, looks promising.
On the biotech side, Gilead looks like an excellent stock to buy on the dip. Its leadership in antivirals and solid pipeline make it compelling.
Amgen and Biogen? Keep them on your watch list while they try to find their footing in this situation.
Bob texted me again this morning - turns out he's filing an appeal with help from one of Silicon Valley's top healthcare attorneys. Typical Bob, bringing a cannon to a knife fight.
But maybe that's exactly what this sector needs right now - some heavy artillery to shake up the status quo.
For those willing to dodge the crossfire, there might just be some spoils of war worth picking up. After all, fortune favors the bold—and sometimes, the heavily armed.
Mad Hedge Biotech and Healthcare Letter
October 24, 2024
Fiat Lux
Featured Trade:
(A HEALTHCARE STOCK THAT OWNS TOMORROW)
(UNH), (HUM), (ELV), (CVS)
After decades of watching healthcare stocks, I've learned one immutable truth - demographics always win. And right now, demographics are handing UnitedHealth Group (UNH) the keys to the kingdom.
The numbers tell an impressive story. UnitedHealth just reported Q3 2024 revenue of $100.82 billion, up 9.2% year-over-year. That's a billion dollars above what Wall Street expected, even after weathering a nasty cyberattack on their Change Healthcare unit in February.
Let's put this in perspective. By 2031, America's national health expenditure will hit $7.17 trillion - more than the GDP of Japan and Germany combined. This isn't just another growth story.
Besides, having managed hedge fund money through multiple market cycles, I’d like to think that I know the difference between lucky timing and structural advantage. From the looks of how things are going, UnitedHealth has engineered themselves the latter.
The company's UnitedHealthcare segment tells only part of the story, bringing in $74.85 billion in Q3, up 7.2% from last year.
Their Medicare Advantage enrollment grew from 7.65 million to 7.81 million people, while their U.S. commercial health plans expanded from 27.25 million to 29.73 million members.
Yes, they took a hit on their global numbers after selling their Brazilian business - dropping from 5.48 million to 1.34 million customers. But sometimes the best deals are the ones you don't do.
The real story here is Optum and its aggressive push into value-based care.
While competitors are still figuring out how to merge technology with healthcare delivery, UnitedHealth has already built a fortress. Their $13 billion acquisition of Change Healthcare wasn't just about processing claims - it was about owning the healthcare data highway.
Optum's revenue jumped 12.5% to $63.79 billion, with their pharmacy division surging 18.5% to $34.21 billion. They processed 410 million prescriptions in Q3 alone - that's 30 million more than last year.
What Wall Street is missing is UnitedHealth's positioning for the post-COVID healthcare landscape. They're not just riding the telehealth wave - they're reshaping it.
Their OptumRx digital platform now handles 80% of all prescription transactions, while their virtual care visits have grown tenfold since 2019.
In fact, the regulatory environment plays into their hands.
While smaller players struggle with Medicare Advantage rate adjustments and value-based care requirements, UnitedHealth's scale and technology infrastructure turn these challenges into opportunities.
Their compliance systems and data analytics capabilities give them a moat that gets wider every quarter.
Wall Street expects Q4 revenue between $100.48 billion and $104.14 billion. Their P/S ratio of 1.41x looks rich compared to Humana (HUM) at 0.29x and Elevance Health (ELV) at 0.57x. But in this market, scale and execution command a premium.
Looking ahead, I see UnitedHealth hitting $552 billion in revenue by 2028. The catalysts are clear: aging demographics, rising chronic disease management post-COVID, and the unstoppable march toward value-based care.
Their Q3 non-GAAP EPS of $7.15 beat estimates by 12 cents. By 2028, I expect EPS to reach $44, with their P/E ratio dropping from 22.75x to 12.99x.
Their balance sheet remains rock solid - net debt/EBITDA ratio below 1.5x, with investment-grade ratings from S&P Global (SPGI), Fitch, and Moody's (MCO).
UnitedHealth also keeps growing its dividend by double digits, maintains a predictable business model, and outperforms competitors like CVS Health (CVS) and Humana on ROE.
Admittedly, they slightly lowered their 2024 adjusted EPS guidance, spooking some traders. But in my experience, Wall Street's short-term panic creates long-term opportunities.
So, what’s the play here? I suggest you build a position in UnitedHealth now while the stock has pulled back. Scale in gradually if you're concerned about timing, but don't miss this opportunity.
Remember, in the end, this isn't just about healthcare - it's about owning a piece of America's unstoppable demographic destiny. And that's a trend even a skeptic like me can believe in.
Mad Hedge Biotech and Healthcare Letter
July 30, 2024
Fiat Lux
Featured Trade:
(RETAIL THERAPY, MEET RETAIL RX)
(HUM), (WMT), (WBA), (UNH), (CVS), (TDOC)
In my years of covering the markets, from the trading floors of Tokyo to the halls of power in Washington, I've seen my fair share of unexpected partnerships.
But the recent tie-up between Walmart (WMT) and Humana (HUM) has me sitting up and paying attention.
That’s right. Walmart, the king of rollbacks and home of the $1 hot dog, has found a new tenant for the vacant spaces that used to house its healthcare business: Humana's CenterWell health clinics.
Humana, as you know, is one of the biggest players in the Medicare Advantage game, and is setting up shop in 23 Walmart Supercenters across Florida, Georgia, Missouri, and Texas.
And they're not just dipping their toes in the water – they're diving in headfirst, with plans to have these clinics up and running by the first half of 2025.
Now, I know what you're thinking. "John, why should I care about some dusty old retail giant like Walmart getting into bed with a health insurance company?"
Let me tell you why.
Humana's Q1 2024 earnings were nothing to sneeze at, with revenues growing 11% year-over-year to a whopping $29.6 billion.
And while the company did revise its full-year EPS guidance downward, it maintained its outlook for adjusted EPS and even revised its membership growth in MA plans upward.
This is a big deal, folks. Medicare Advantage plans have been the bread and butter of Humana's business model, underpinning the company's phenomenal share price gains from $25 per share in 2010 to over $550 in late 2022.
With the population aging faster than fine wine, the demand for senior-focused healthcare services will only grow.
But Humana isn't the only one benefiting from this partnership.
For Walmart, renting out these spaces to CenterWell allows them to recoup some of the infrastructure investments they made in building out their 51 Walmart Health clinics, which they recently shut down due to profitability challenges.
It's like finding a roommate to help pay the rent after your startup goes belly up.
But the healthcare industry is like a giant game of Jenga, with players constantly pulling out blocks and hoping the whole thing doesn't come crashing down.
Just look at Walgreens Boots Alliance (WBA), another retail giant that recently announced the closure of 150 of its in-store clinics due to profitability challenges. It's a stark reminder of how difficult it can be to make a buck in this business.
That's why Walmart's pivot to a partnership model with Humana is so intriguing.
By leasing out pre-equipped facilities to CenterWell, Walmart is essentially letting Humana handle the nitty-gritty of patient care while still maintaining a presence in the rapidly growing primary care industry.
It's like having your cake and eating it too, without having to worry about the pesky details of actually baking the cake.
As expected, Walmart and Humana aren't the only ones making moves in the healthcare space.
CVS Health (CVS) and UnitedHealth Group (UNH) are also betting big on primary care, with CVS acquiring Oak Street Health for $10.6 billion and UnitedHealth's Optum division going on an acquisition spree to expand its network of physicians and healthcare providers.
Then, there’s the meteoric rise of telehealth during the pandemic. Companies like Teladoc Health (TDOC) saw their revenues skyrocket as patients turned to virtual care in droves.
While growth has slowed down since the height of the pandemic, telehealth is still a force to be reckoned with and could potentially disrupt traditional brick-and-mortar clinics.
So, what does all this mean for us?
Well, if you're an investor looking to get in on the action, you've got plenty of options. From established players like Humana and UnitedHealth to up-and-comers like Oak Street Health and Teladoc, there's no shortage of companies vying for a piece of the healthcare pie.
With an aging population, rising healthcare costs, and a growing focus on preventative care and chronic disease management, the demand for innovative healthcare solutions is only going to increase in the coming years.
And who knows, maybe one day we'll all be getting our annual check-ups at the local Walmart, with a side of low-priced toilet paper and a jumbo bag of Cheetos.
Stranger things have happened in the wild world of healthcare.
Mad Hedge Biotech and Healthcare Letter
December 5, 2023
Fiat Lux
Featured Trade:
(A UNION IN THE MAKING?)
(HUM), (CI), (CVS), (AET), (UNH)
The healthcare market was recently abuzz with the news of a potential mega-merger that sent shares of Humana (HUM) and The Cigna Group (CI) into a nosedive - 5.5% and 8.1% respectively. This news, centered around a transaction combining stocks and cash, could significantly reshape the healthcare landscape.
But let's not get ahead of ourselves. After all, in the world of healthcare mergers, certainty is as elusive as a mirage.
Still, if you’re feeling a sense of déjà vu, it’s because this isn’t the first time Humana and Cigna have danced around the idea of a merger.
Recall 2015 when Humana flirted with the idea of a merger with Cigna but ended up cozying up to Aetna (AET) – a union that never saw the light of day, thanks to the US courts.
A similar fate befell an attempted merger in 2017, when Elevance Health (ELV), then known as Anthem, tried to acquire Cigna for $48 billion, only to be blocked by the courts.
Since these previous attempts, both Humana and Cigna have significantly grown.
Prior to this market shake-up, Humana boasted a market capitalization of $62.87 billion, with Cigna commanding a higher ground at $83.77 billion.
But as history shows, regulatory skepticism often casts a long shadow over such ambitious plans, with fears of increased costs for the American public. This skepticism has extended to smaller deals, such as UnitedHealth Group's (UNH), which faced hurdles in their acquisition attempts.
Yet, the potential merger between these healthcare giants teases the possibility of substantial cost savings.
When giants unite, the promise of cost savings looms large. Redundancies in corporate functions like HR, investor relations, and executive positions offer low-hanging fruits for cost-cutting.
But the real cherry on top is the potential for operational synergies – cross-selling opportunities and leveraging infrastructure for efficient service delivery.
Humana's stronghold lies in its Insurance unit and CenterWell, with the latter, including pharmacy, provider services, and home solutions, contributing 16.3% of last year's revenue.
In contrast, Cigna wades into deeper waters, with its substantial revenue streams from pharmacy benefits and home delivery pharmacy businesses.
Now, let’s look at the companies in terms of revenue. A side-by-side of Humana and Cigna's revenues offers an intriguing picture.
Humana's Medicare Advantage revenues soared from $59.47 billion in 2020 to $72.89 billion in 2022.
Cigna, however, has only inched forward in this space. Humana's evident dominance in Medicare Advantage, with a market share of about 18%, contrasts sharply with Cigna's modest 2%.
Despite these differences, a merger isn't outside the realm of possibility.
For example, CVS (CVS) managed to successfully acquire Aetna for $69 billion back in 2018, with the two companies eventually turning into CVS Health.
While that merger proved that big deals could happen, the odds for Humana-Cigna are not exactly in Vegas betting territory.
Speculations about Cigna offloading its Medicare Advantage operations could make this merger more palatable to regulators, but it's far from a sure bet.
Another question to think about amidst these talks is why the market reacted like someone yelled “fire” in a crowded theater.
Well, it all boils down to the fear of overpayment.
Cigna, being larger, could potentially swallow Humana. But Humana, with its stronger financial health and market positioning, is seen as the more desirable entity.
The valuation metrics – price to earnings, price to adjusted operating cash flow, and EV to EBITDA – further complicate this perception, as Humana commands a premium.
With a potential merger announcement might be on the horizon, investors should approach this with a blend of skepticism and intrigue. The market is jittery, perceiving a possible merger as potentially detrimental to shareholder value.
However, should the merger succeed against the odds, the combined prowess of Humana and Cigna could spell a profitable future for investors. Knowing that the healthcare sector is never short of surprises, this potential merger, should it come to pass, could be one for the history books.
Mad Hedge Biotech and Healthcare Letter
August 3, 2023
Fiat Lux
Featured Trade:
(A FUTURE-PROOF INVESTMENT)
(UNH), (CI), (HUM), (CNC)
With a staggering market cap of $472 billion and a network reaching scores of policyholders, UnitedHealth Group (UNH) is an undisputed titan in the health insurance industry.
To put this into perspective, its competitors such as Cigna (CI), Humana (HUM), and Centene (CNC) have market caps of $86.42 billion, $56.64 billion, and $36.32 billion, respectively.
However, the past year witnessed a slight dip in UnitedHealth’s share price by 2%, which noticeably lags the broader market's return of 17%.
This raises a question: Is UnitedHealth’s investment appeal dwindling, or is it merely in a brief pause?
One can't discuss the health insurance sector without addressing the brewing storm of growth in its forecast. This sector is expected to welcome a turbocharged surge fuelled by an escalating burden of maladies and an expanding aging population worldwide.
The global landscape is witnessing a steep rise in various chronic afflictions - from cardiovascular and respiratory conditions to neurological disorders, cancer, musculoskeletal diseases, and diabetes. With the world population growing savvier about the financial cushioning health insurance provides, we're staring at a potential boom in this sector.
Take a gander at the numbers: The global health insurance industry was valued at a hefty USD 2.17 trillion in 2022.
Fast forward to 2032, and we're talking about a market swelling to an eye-watering USD 4.37 trillion. And with a projected CAGR of 7.3% from 2023 to 2032, we can safely say the health insurance express isn't slowing down anytime soon.
With this backdrop, let's dive into the compelling aspects of investing in UnitedHealth.
First, let's delve into the favorable aspects of investing in UnitedHealth. The core rationale is simple: healthcare is perennial. As long as human beings exist, healthcare will always be needed.
In the United States, individuals or their employers inevitably need to secure health insurance on a monthly basis. The constant evolution and improvement of healthcare services create a fertile ground for potentially substantial earnings in both the insurance and healthcare delivery sectors.
UnitedHealth, a veritable powerhouse, operates two key divisions - one specializing in health insurance and prescription coverage, and the other focused on healthcare provision. This dual-pronged approach has the potential to create sustained shareholder value.
Finding a flaw in this favorable proposition is challenging, particularly when examining the figures.
The company amassed an impressive $93 billion in revenue in the second quarter of 2023 alone, making it one of the world's largest corporations. It outperformed analysts' predictions of $91 billion, and the earnings per share of $6.14 surpassed Wall Street estimates of $5.99.
Although the company's medical care ratio did increase from 81.5% to 83.2% as expected, this was offset by a robust revenue growth that outpaced the rise in medical and operational costs.
UnitedHealth provides insurance to over 51 million individuals, with an addition of over a million new policyholders in 2023. UnitedHealth's scale allows it to keep costs low, forming a formidable entry barrier for new market contenders.
Moreover, its quarterly revenue experienced a notable 63% increase over the past five years, hinting at significant growth potential. This suggests that UnitedHealth's future growth prospects remain robust.
Straight from the company itself, UnitedHealth anticipates growing its earnings per share (EPS) between 13% and 16% annually. Moreover, the company has shown consistent dividend growth, with an annual increase of 10% since 2010.
This indicates a company that excels in operating its business model over time, suggesting potential stability and growth in both share price and dividends.
One key strategy of UnitedHealth is its diverse portfolio, developed over the years through strategic acquisitions like home health company LHC Group and analytics firm Change Healthcare. This diversity has allowed the company to maintain a growth rate exceeding 10% over the last five years.
UnitedHealth's most significant growth driver remains its premiums, but the company also saw an additional $2 billion in revenue from services and $1.2 billion from product sales last quarter.
Although it faces potential increases in medical costs, the company's diversified portfolio helps it maintain strong profit growth, with adjusted earnings per share rising 10% to $6.14 year-on-year.
Despite the overall positive outlook, it's worth noting that UnitedHealth's shares have decreased by about 4% this year. While the stock is trading at 23 times trailing earnings, slightly below the healthcare industry average of 25, the company's consistent growth could justify a higher valuation.
Overall, UnitedHealth remains a promising investment in the long run despite some short-term volatility, as it offers a blend of stability and growth. It may well be a stock worth considering for those looking for a long-term hold in the healthcare sector. I suggest you buy the dip.
