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Centene Dodges Bullets In Changing Medicaid Landscape

By: Investor's Business Daily
Posted: 6/11/2014 4:57:00 PM
Referenced Stocks: GILD;CNC;UNH;WCG

As managed-care organizationCentene readied its first-quarter report in April, investors were getting very nervous.

This year brought the first quarter when the managed-care industry faced a new health-insurer fee imposed under the Affordable Care Act (ACA). The fee will continue to rise through 2018.

It was also the first full quarter of sales forGilead Sciences ' ( GILD ) mega-blockbuster hepatitis C drug Sovaldi. While Sovaldi has far greater efficacy and lower toxicity than the traditional regimen of interferon, the $84,000 price tag for a full round of treatment -- combined with the sheer volume of infected patients -- led some insurers to grumble that it would break the bank.

Centene's ( CNC ) largest competitor,UnitedHealth ( UNH ), seemed to confirm some of those fears when it reported its Q1 a week before Centene. Its results missed estimates, and one reason it gave was the $100 million in hepatitis C payouts.

Centene seemed especially vulnerable to a similar impact, given the nature of its user base. Centene's specialty is the Medicaid managed-care business, which it conducts under state contracts. It also has a growing presence in "correctional health care" -- that is, prisons. Thus its customers are largely poor and/or imprisoned,making them more likely to have hepatitis C.

Consensus Crushed

So it came as an enormous relief to Wall Street when Centene came out and crushed the consensus Q1 numbers and raised its full-year outlook. Profit jumped 36% over the year-earlier quarter to 57 cents a share, beating estimates by 14 cents, while revenue rose 37% to $3.46 billion, more than $200 million above the Street's consensus.

Centene's chief strategy was to be well prepared, especially on the Sovaldi front, says Leerink analyst Ana Gupte.

"They have been on watch far more than the commercial payers," Gupte told IBD. "They've been trying to make sure they get some public-policy attention (so) they get some support from the broader health-care community with state Medicaid negotiation, so they get the reimbursement that they're seeking."

If the state does not put Sovaldi on its preferred formulary -- such as in Texas, where Centene does a large amount of business -- then Centene just won't pay out. This result has made Sovaldi even more controversial, as some regard it as inhumane to deny people such a superior drug. Centene CEO Michael Neidorff said on the Q1 conference call that the company has to follow state policy, but remarked, "It is important to note these new therapies are curative; thus it is possible that longer-term savings will be realized from reducing other medical costs associated with hepatitis C."

At the same time, Centene has also been playing the other side of the market through the other segment of its business, specialty services. In April last year it acquired AcariaHealth, one of the largest independent specialty pharmacies in the U.S., which also happens to be one of the largest managers of hepatitis C care. That business actually makes more money from the purchase of expensive drugs.

In his April 16 initiation report on Centene, UBS analyst A.J. Rice cited the specialty business as a key differentiator from Centene's peers.

"The specialty services complement CNC's core Medicaid Managed Care business, diversify the company's revenue stream, provide higher-quality health outcomes to CNC's membership and others, and assist in controlling costs," Rice wrote. "We believe the company's ability to cross-sell specialty products, including behavioral health, disease management, and pharmacy, has helped CNC to reprocure existing or win new business in the recent years."

Centene's rate of new business wins -- it has captured 89% of the contracts it has bid on -- has especially caught Wall Street's attention and driven its growth. When the company went public in 2001, it was operating in just three states. Today, it is in 20, and is the largest pure-play Medicaid MCO in the country.

Analysts are expecting more growth as Medicaid coverage expands due to the ACA rollout. Rice said that new eligibility rules that went into effect at the start of this year could bring 80,000 new members to Centene, coming to about $240 million in revenue. The company is also expanding its membership rolls through buyouts, most recently when it acquired Community Health Solutions' contract with Louisiana, bringing 200,000 lives aboard.

ObamaCare Exchanges

Centene has also jumped into the ACA's new health insurance exchanges in nine states through its Ambetter brand. Neidorff said in April that its financial impact on 2014 would be minimal, but he said that by the end of the current quarter enrollment should reach about 70,000.

"In the long run, we view this initiative positively," FBR analyst Steven Halper wrote in a May 19 note, but he added, "Initial enrollment figures have been lackluster, and the company has indicated that it will reach the low end of its previous membership expectations from this segment."

Some analysts' investment theses on Centene include the possibility that it will be bought. In early June, in fact, there were rumors that non-profit hospital chain Ascension Health was looking to buy a health insurer active in 18 states, leading Gupte to speculate that Centene orWellCare Health Plans ( WCG ) was the target. That drove the stock to a new high until Citigroup debunked the rumor, but Centene may still be an attractive candidate in a consolidating industry.

"Ascension was a long shot, particularly with Centene," Gupte said. "But it's hardly the only company that's interested."

Analysts expect Centene's profit to grow 29% this year to $3.71 a share, then climb another 20% next year to $4.47.