HUM/UNH: Weak Flu Season Likely Benefit to 4Q15 EPS

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Richard Evans / Scott Hinds / Ryan Baum


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January 20, 2016

HUM/UNH: Weak Flu Season Likely Benefit to 4Q15 EPS

  • The 2015 – ’16 flu season is orders of magnitude less severe than last year; we estimate flu-related hospital spending was down more than 90 percent, year-on-year, during 4q15
  • This implies a roughly 2 percent drop in overall hospital spending for 4q15 v. 4q14. Because the 2014 season affected seniors disproportionately, the drop in overall hospital spending for Medicare beneficiaries is much larger – on the order of 4.3 percent
  • Insurers with larger populations of Medicare beneficiaries as a share of enrollment (e.g. HUM at 32.5 percent, UNH at 27.8 percent) are the main beneficiaries of the weaker flu season. This is consistent with the better than expected medical cost trend that UNH reported for 4Q15


Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BMY, GILD, SHPG, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)


The warm fall and early winter (U.S. temperatures were 3.4 degrees above average during 4q15 – including 5.4 degrees above average in December) yielded the slowest start to the flu season since 2011 (Exhibits 1, 2)

While not perfectly correlated with eventual full-season dynamics (note, in particular, the late-season peak in 2010-11 that was preceded by a less-than-noteworthy start), the state of the season around New Year’s Day tends to be indicative of how the season will play out. By any measure 2015-16 looks to be extremely mild, with a positive test rate 40 percent below the trailing 5-year average and a cumulative hospitalization rate nearly 90 percent below the trailing 5-year average

More important, we’re coming out of a particularly severe flu season, and the year-on-year dynamics represent an unprecedented drop in severity, particularly for persons aged 65 and older (who were disproportionately negatively impacted by the 2014-15 flu strain). We estimate that 4Q15 flu-related hospital spending is about 95 percent lower than last year (Exhibit 3)

According to National Health Expenditure data from the Centers for Medicare & Medicaid Services, 4Q15 Medicare hospital spending was projected to be around $64B. A $2.7B drop in flu-related hospitalization spending for the elderly represents about 4.3 percent savings in Medicare hospitalization spending for the quarter. Assuming that the $64B estimate bakes in a more typical flu season than 2014-15, the potential savings are closer to 1.2 percent

Ex-Medicare hospital spending during 4q15 was around $194B, so a $2.7B tailwind would be just 1.4 percent – and the deviation from a more typical fourth quarter is actually just $1.2B, or 70bps. The current mild flu season benefits all commercial insurers’ 4Q15 medical costs, the bulk of the impact is concentrated in insurers with significant Medicare exposure (Exhibit 4).

©2016, SSR, LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

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