美股生命科学诊断行业二季度预览内趋势剖析

16July2019Americas/UnitedStatesEquityResearchLifeScience16July2019Americas/UnitedStatesEquityResearchLifeScienceToolsandDistributorResearchErinWilson212538Katie212325George2123252QPreview:Dissectingintra-quarter■EasingConcernOverDrugDistributors:Sharesfordrugdistributors,includingAmerisourceBergen(ABC,Outperform)andCardinalHealth(CAH,Outperform)arecurrentlytradingata7.5xFY+2EV/EBITDAonaverage,ameaningfuldiscounttotheir8.6xfive-yearhistoricalaverage,withongoingconcernsrelatedtoopioids,Amazon,andcontinuingdrugpricingscrutiny,albeitwithsomeNTrelieffollowingtheTrumpAdministration’sannouncementnottopursuechangestoMedicarePartDrebaterules.Wealsonotecompany-specificheadwindsrangingfromcontinuedintegrationheadwinds,Medicalsegmentwoes(CAH),andmanufacturingsuspensions(PharMEDium,ABC—albeitalreadystrippedfromguidance).Intermsof2Qreports,ourviewisthatsomestabilityinthegenericdrugpricingenvironmentaswellashealthierthanpreviouslyexpectedbrandedpriceinflationshoulddrivepotentiallylessvolatileC2Qreports,consistentwithcommentaryfromourABCNDR(seeManagementMeetingTakeaways).Investorconcernlikelyremainsonflaggingexecutioninancillaryofferingsandrecentmanagementdepartures,namelyforCAHwhereinvestorsentimentis,inourview,thelowestaheadofitsFY20initialguidance.WearetemperingourouteryearFY20EPSestimatesforCAHto$5.15(from$5.35),betterreflectingongoingMedicalsegmentwoes,albeitstabilizingpharmaceuticalsegmentperformance.WhilemedicalandprofitheadwindsrepresentcontinuingheadwindsforCAH,wecontinuetoviewcontributionsfromthispotentiallyfastergrowing,moreprofitable,andoftentimesmorecapitalefficientancillarybusinesswillsupportitsmarketpositioningovertimewithimprovedexecution.MedicalDistribution—MaintaincautiousoutlookonOMI:Onthemedicaldistributionside,weremainnegativelydisposedtowardOwens&Minor(OMI,Underperform).WhileaturnaroundstoryisnotoffthetableforOMI,whereitdisclosedimprovingservicelevelsin1Q,weviewitmaybemuchlongerterminnature,whereatumultuous2018experience,commoditypricingpressures,andmanagementfluxhasweighedonresultsandbroaderinvestorsentiment.WealsonotecertainpreviouslyannouncedcustomerlosseswillmoremateriallyimpactOMI’s2020results,suggestingoverhangswillremainoverthemediumterm.Wearereducingourtargetpriceto$3.05(from$4.00)onlowerconvictioninOMI’slongertermoutlook,particularlygivenOMIisinherentlylessnimblewith5.9xTTMnetleverage,drivingincrementalriskinarapidlyevolvinghealthcarecontinuum.■DISCLOSUREAPPENDIXATTHEBACKOFTHISREPORTCONTAINSIMPORTANTDISCLOSURES,ANALYSTCERTIFICATIONS,LEGALENTITYDISCLOSUREANDTHESTATUSOFNON-USANALYSTS.USDisclosure:CreditSuissedoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.每日免费每日免费获取报关注公回复：研究报加入“起点财经”微信群。16July16July■LacklusterRxvolume,butstabilizinggenericpricingdynamics:AccordingtoIQVIA,adj.prescriptionvolumerose0.2%inMay,amodestaccelerationfromflatgrowthinApril2019(QTDaveragevolumegrowthof+0.1%).BasedonouranalysisofthetotalgenericdrugsalesasreportedbyIQVIAonanunweightedbasis,thesell-sideASPforgenerictherapeuticsfell2.4%inMay,adeteriorationfromthe2.2%riseinApril.Onasales-weightedbasis,genericpricingdeclined2.9%inMay,comparedtothe-1.9%experienceinApril.Moreover,accordingtoAprilNADACdata,asurveyperformedbytheCMStogaugetheaveragenationalacquisitioncostsforretailpharmaciesacrosstheUS,32.3%ofallreportedgenericsexperiencedpricedeclinesinexcessof5%,animprovementfromtheMarchexperience(43.0%).Forcontext,ongoinggenericpricedeflationoverthepasttwoyearshasweighedondrugdistributors,aspricedeclineshaveledtolowergrossprofitdollars,andwhilewedonotexpectasignificantreversalNT,thesupplychaingrouphasnotedstabilizingtrendsQTD,alignedwithouranalysis.216July16JulyAcontinuinglacklusterutilizationenvironment,asevidencedbyIQVIAdataandmetricsfrompharmacysupplychainconstituents,maycontinuetohamperquarterlyperformancefordrugdistributors.Thatsaid,amodestlystabilizinggenericpricinglandscapeissomewhatencouraging,aswellasanincrementallyhealthierbrandedpriceinflationenvironmentthanpreviouslyexpected(oratleastbettervisibilitythereon),potentialsourcesofneartermrelief.Thatsaid,weacknowledgenotablerisksinopioidlitigationandbroaderdrugpricingscrutiny.Allin,wecontinuetofavordistributorswithexposuretofaster-growing,higher-marginancillaryservices,whichshouldprovidediversificationfromdrugutilization/pricing,amongothersupplychaindynamics,whilealsoprovidinghighergrowth/profitpotentiallongerterm.Tothatend,wefavorAmerisourceBergen(ABC)aswecontinuetoviewcontributionsfromitsnon-traditionalbusinessesincludingMWI,WorldCourier,amongothersasencouraging(excludingPharMedium).ABCisalsoexperiencingrespectableperformanceacrossitscoresegmentoflate,anotabletrend.CardinalHealth(CAH)shouldbenefitfromafastergrowingspecialtypharmacybusinessaswellasgradualstepped-upcontributionsfromitsMedicalsegmentfollowingitsrecentMedtronicPatientRecoveryacquisition,albeitacknowledgingexecutiononMedicalsegmentdealintegrationhasnotbeensmooth.WhilethequarterlyperformanceatCAHhastestedourpatience,andtherecentCFOdepartureannouncement(effectiveAugust9)maycausesomeunease,wecontinuetobelieveitsdiversificationeffortswillbearfruit,albeitalongertermdynamicthanoriginallyanticipated,particularlyasitaddressesheadwindsatCordis,withtheimplementationoftechnologyinitiativesandmanagementchanges.Inmedicaldistribution,weremainnegativelydisposedtowardOwens&Minor(OMI),acompanywhichhasonlymorerecentlybegunitsjourney(vialargeacquisitions)toincorporateself-manufacturedproductsintoitsstrategytosupportitspositioninginthemedicaldistributionmarket.WhileaturnaroundstoryisnotoffthetableforOMI,weviewitmaybemuchlongerterminnature,whereatumultuous2018experience,commoditypricingpressures,andmanagementfluxhaspointedtosignificantconcernsinitscorebusiness.Moreover,with5.9xnetleverage(onTTMEBITDA),OMIisinherentlylessnimble,drivingincrementalriskinarapidlyevolvinghealthcarecontinuum.Below,weincludeourhigh-levelthoughtsonrecentindustry trends,aswellasourexpectationsforeachdistributorheadingintothequarter.316JulyFigure1:CSHealthcareSubsector SpecialtyPharmaDrugRetailers&PBMsManagedCareSpecialtyPharmaDrugRetailers&PBMsMedicalDevicesDrugRetailers&ManagedCareMedicalDrugRetailers&PBMsMedicalDevicesSpecialtyPharmaLargeCapPharmaDrugSpecialtyPharmaLargeCapPharmaLargeCapManagedCareLarge16JulyFigure1:CSHealthcareSubsector SpecialtyPharmaDrugRetailers&PBMsManagedCareSpecialtyPharmaDrugRetailers&PBMsMedicalDevicesDrugRetailers&ManagedCareMedicalDrugRetailers&PBMsMedicalDevicesSpecialtyPharmaLargeCapPharmaDrugSpecialtyPharmaLargeCapPharmaLargeCapManagedCareLargeCapClinical--MedicalDevicesManagedCareManagedCareLargeCapPharma-LargeCap--SpecialtyPharma--DrugRetailers&PBMs--LargeCapDrugDrug-SpecialtyPharmaDrugRetailers&---SpecialtyPharma--DrugRetailers&--Source:FactSet,CreditSuisse;Note:DentalpeergroupdoesnotincludeAlignTechnologies(ALGN);Pricesasof11AMETonJuly15,AquickcutofourpreviousquartertakeawaysandC1Q■ABC’ssharesrose5%followingitsF2Qoperationalbeatonlowerrevenueoffsetbystrongerprofitability,onabetterunderlyingcorepharmaceuticaldistributionprofitexperience.Inconjunctionwiththereport,ABCreaffirmeditsoperationalguidancefortheyear,despitethebeat,implyingatempered2Hprofitexperiencerelativetopreviousexpectations.DespiteongoingPharMEDiumwoesandriskfactorsinsupplycontracts,wehighlightrevenueandprofitdriversinapotentiallystabilizinggenericpricingenvironment,WBA’smaturingpharmacynetworkrelationships,RADonboarding,ESRXrelationship,andcontributionsfromotherdiversifiednon-coreunits.Despitefocusonthecompetitivelandscapeevolution,previouslyreportedpharmacyunderperformance,continuingdrugpricingscrutiny,andopioidlitigation,ABChaverisen27%sincearecentlowonApril22(vs.4%S&P500).Allin,weareforecastingF3QEPSof$1.57(+1.7%,vs.Consensus$1.62),predicatedon+4.8%PharmaceuticalDistributiongrowth,temperedbyongoingheadwindsatPharMEDium,and+4.0%Othergrowth,aswellasa5bpsEBITDAmarginexpansion.CAH’sF3Qhandilyexceededourestimateonstrongerrevenuemorethanoffsetbyweakerprofitability,withfactorsbelowthelinedrivingthebeat(+$0.23).DespitethemeaningfuloperationalmissdrivenbyweakMedicalsegmentperformance,whereMedicaloperatingprofitisnowexpectedtodeclineLSD-MSD(vs.priorriseMSD-HSD)inFY19,sharesrose0.5%onadmittedlyweakexpectations.Moreencouragingly,CAHannouncedithasreneweditsCVSHealthrelationshipthroughJune2023,underscoringthevalueitprovidestoitslargepartners.Allin,expectationsstillappearlowasweawaitFY20guidance,particularlyfollowingtherecentlyannounceddepartureofCFOJorgeGomez(effectiveAugust9).Thatsaid,weviewupsidepotentialmaystemfromhealthierthanexpectedbrandedpricinginflation,astabilizinggenericpricingenvironment,continuingstrengthinitsPatientRecoverybusiness,andcostsavingopportunities.ThoughwenoteCAH’squarterlymisstepshavechallenged■4S&P500 Clinical LifeScience Drug Medical Animal Managed Specialty LargeCap - -DrugRetailers& - S&P500 Clinical -Drug -S&P500 -Animal Contract LifeScience LifeScience Animal 2019YTD(asofClinical LifeScience Contract S&P500 Animal Clinical S&P500 - Clinical -LifeScience S&P500 LifeScience S&P500 Drug S&P500 Drug Clinical LifeScience Drug Contract Animal Clinical LifeScience Contract 16Julyourpatience,wecontinuetoremainpositivelydisposedtowardthestock,giventheaforementionedopportunities,andviewaclearerpathtoprofitabilityatCordis,improvedexecutioninMedicalmorebroadly,andasolidCFOappointmentcanreestablishenthusiasmforshares.Thatsaid,thetimelineonthesedynamicsisnotexactlyclear.WeforecastF3QEPSof$0.93(-11.4%,inlinewithConsensus),predicatedon+4.3%revenuegrowth(incl.+5.0%Pharmaceutical,-1.0%Medical)andoperatingmarginexpansion(10bps;-6bpsPharmasegment).WhileOMI’s1Qexceededourconservativeestimateonbetterrevenuesandprofitability,itmissedConsensusdrivingitsshareslower.Thatsaid,weareheartenedbynewmanagement’svision,whereweviewaturnaroundstoryisn’toutofthepicture,wheremanagementhasnotedimprovedservicelevelsy/y.Thatsaid,afull-fledgedturnaroundislikelymuchlongerterminnature,whereitenduredincrementalcustomerlossesin1Qinresponsetopreviouslydisclosed2018servicesissuescausedbyvendorM&A,naturaldisasters,highinternalturnover,andotherfactors.Moreover,OMIremainsmeaningfullyleveredat5.9xTTMEBITDA,andweviewfurtherdownsideaswarrantedgivenongoingcompetitivechallengesamidstlikelylacklusterfundamentaldemand.WeareforecastingF2QEPSof$0.07(inlinewithConsensus),predicatedon-0.9%revenuegrowth,including-4.6%GlobalSolutionsgrowthand16Julyourpatience,wecontinuetoremainpositivelydisposedtowardthestock,giventheaforementionedopportunities,andviewaclearerpathtoprofitabilityatCordis,improvedexecutioninMedicalmorebroadly,andasolidCFOappointmentcanreestablishenthusiasmforshares.Thatsaid,thetimelineonthesedynamicsisnotexactlyclear.WeforecastF3QEPSof$0.93(-11.4%,inlinewithConsensus),predicatedon+4.3%revenuegrowth(incl.+5.0%Pharmaceutical,-1.0%Medical)andoperatingmarginexpansion(10bps;-6bpsPharmasegment).WhileOMI’s1Qexceededourconservativeestimateonbetterrevenuesandprofitability,itmissedConsensusdrivingitsshareslower.Thatsaid,weareheartenedbynewmanagement’svision,whereweviewaturnaroundstoryisn’toutofthepicture,wheremanagementhasnotedimprovedservicelevelsy/y.Thatsaid,afull-fledgedturnaroundislikelymuchlongerterminnature,whereitenduredincrementalcustomerlossesin1Qinresponsetopreviouslydisclosed2018servicesissuescausedbyvendorM&A,naturaldisasters,highinternalturnover,andotherfactors.Moreover,OMIremainsmeaningfullyleveredat5.9xTTMEBITDA,andweviewfurtherdownsideaswarrantedgivenongoingcompetitivechallengesamidstlikelylacklusterfundamentaldemand.WeareforecastingF2QEPSof$0.07(inlinewithConsensus),predicatedon-0.9%revenuegrowth,including-4.6%GlobalSolutionsgrowthand+186.2%GlobalProductsgrowth,aswellasEBITDAmargincontractionof33■Figure2:DistributorFY+2P/E Figure3:DistributorFY+2EV/EBITDA ABC:14.4xCAH:13.0xMCK:12.3xOMI:13.6xABC:8.9xCAH:8.2xOMI:8.2xHistHistSource:FactSet,CreditSuisseestimates;Pricesasof11AMETonJuly15,2019;Note:AllMCKvaluesareonaConsensusestimatesSource:FactSet,CreditSuisseestimates;Pricesasof11AMETonJuly15,2019;Note:AllMCKvaluesareonaConsensusestimatesDivergentBusinessWhilethedrugdistributorsweretraditionallyseenaslargelyhomogenous,theirvaryingapproachestocapitaldeploymentandstrategicpositioninginarapidlyevolvinghealthcareenvironmenthavecontributedtogreaterdifferentiationbetweentheirbusinessmodels,witheachcompanynowearningamoresubstantialportionofitsconsolidatedoperatingprofitfrombusinessesoutsideoftraditionalUSpharmaceuticaldistribution.Asitrelatestomedicaldistribution,weviewahybridapproachasnecessarytosuccessfullycompeteinthemarket,whereconstituentsfurtherskewedtoproprietarybrandedproductsmanufacturingasbetterpositioned(vs.apureplaymedicaldistributionmodel).Belowwereviewbusinessoperationsofeachdistributoroutsideofthetraditionaldrugdistributionmodel,highlightinghowthebusinessstrategiesarediverging.5Mar-Mar-Jul-Mar-16JulyAmerisourceBergen(ABC,16JulyAmerisourceBergen(ABC,Inaseeminglystabilizinggenericdrugpriceenvironment,albeitacknowledginglikelymorebrandpriceinflationscrutinyinanelectioncycle,ourthesisispredicatedonitspartnershipsthatwillhelpdriveincrementalmarketsharegainsoverthenearandlongerterm,contributionsfromitsmorediversifiedofferingofnon-distributionunits(ex.PharMEDium),aswellascapitaldeploymentoptionality.PharMEDiumEmbeddedinExpectations–AwaitingComprehensiveReviewInconjunctionwithitscomprehensivestrategicandfinancialreviewofthebusiness,ABCcloseditssmallestandleast-automatedPharMEDiumfacilityduringF2Q,consolidatingproductionintotheunit’sremainingtwoopenfacilitiestoservicecustomersmoreefficientlyandeffectively.WhilepreviouslyABChadnotedthattheremainingPharMEDiumfacilitiesdonotcoverPharMEDium’sfixedcosts,weviewthisprofitlossdynamicislikelyimproved(thoughpotentiallynotfullyoffset)bythemostrecentoptimizationefforts.Thoughweviewtheseoptimizationeffortsasencouraging,weawaitABC’scomprehensiveandfinaldeterminationofitscommitmenttothePharMEDiumbusiness,which,asareminder,canresultin:1)furtherinvestments,2)furtherbusinessoptimizationactivities,or3)apotentialsaleofthebusiness.WhileABCviewstherearenootherlargersophisticatedcompetitorstomeetdemand,itscGMPexpertconsultantsviewitwillbedifficultforPharMEDium’soverallvolumestoreturntopreviouslevelsinthenextfewyears.Previously,ABChademphasizedithadexpectedtogetbackalmostalllostbusinessovertime,alludingtoashorterramptimelinethanitscGMPconsultantshavenowexpressed.Moreencouragingly,onMay22,ABCenteredaConsentDecree,amajormilestone,whichallowsittocontinuecommercialdistributionattheremainingtwoopencompoundingfacilities.Importantly,inF1Q,ABCremovedtheMemphisfacilitycontributionfromitsFY19guidealtogether(2-3%headwindtoFY19operatingincome).Asareminder,ABCacquiredPharMEDiuminNovember2015for$2.6billion,addingthelargestindependentproviderofcompoundedsterilepreparationstoacutecarehospitalsintheU.S.Withabout3,000hospitalcustomersatthetimeofthedeal,priortorecentcomplications,thehighlyprofitablebusinesshadgrownatanimpressivecliponfurtherpenetrationofexistingcustomersandcustomeradditions.In2015,PharMEDiumsalestotaled~$470million.Otherkeyareasoffocusfor■Cignamail-orderfollowingESRXmerger:CignaannouncedthatithasenteredintoamutualagreementwithOptumRxwherebyitwilltransitionitspharmacybenefitmanagementservicescurrentlyprovidedforCignabyOptumRxtoExpressScripts,apotentialopportunityforABC.Previously,CignapartiallyoutsourceditsPBMandmail-orderpharmacytoOptumRx(currentdistributorCAH).WhencommentingonpotentialimplicationsoftheCI/ESRXtransaction,managementnotedthatwhileABCcurrentlydoesnotprovideanyservicestoCI,itcouldpotentiallypickupvolumeduetoitsstrong(andrecentlyrenewed)relationshipwithESRX.Ancillaryservicestocontributeto19%ofadj.EBITinFY19:WeexpectfurtheremphasisonMWI,WorldCourier,andSpecialty,particularlyasABCcontinuestoexpanditsancillaryofferings.Weexpectperformanceacrossitsnon-corebusinessestoremainkeytoplinegrowthdriversbothorganicallyandperhapsthroughacquisition.OnWorldCourier,ABCnotesitexperiencedaveryhighgrowthyearin2018(+DD),withemphasisonthestrengthinitsinternationalbusiness,whichcurrentlyoperatesin50countries.AsitrelatestoLASH,whileABCexperiencedsomeheadwindsinthisbusinessoverthepast~year,itnowviewsthebusinessisimproving,asevidencedbystrengtheningbusinesswins.Importantly,ABCviewsLASH’sFusionplatformwillsupportgrowthoverthenear-andlonger-term.■616July■HighlightingMWI–ALeadingAnimalHealthDistributor:16July■HighlightingMWI–ALeadingAnimalHealthDistributor:InlateJanuary,Marsdisclosedthatithadterminateditscontract(VCA,PetPartners~$100millionannualizedrevenues)withHenryScheinAnimalHealth(nowCovetrus),movingitsbusinesstoMWIAnimalHealth,whereMars-ownedBanfield(~1Khospitals)hasmaintainedalong-standingprimarydistributionrelationship.ThisrelationshipshiftemphasizesMWI’sabilitytodeepenrelationshipswithstrategicpartnersinthefastgrowingAnimalHealthmarketplace.Ofnote,MWIreported+2%growthinF2Q,drivenbyfasterCompanionAnimalgrowth,partiallyoffsetbyLivestockgrowth,whichwasimpactedbyweatherintheMidwestduringthequarter,adynamicthatmayrecoverinthecomingquarters.Acquiringincrementalscaleorverticals–NointerestinMed-Surg:ABCtendstofavorpharmaceutical-centricadjacenciesandremainswaryofmanufacturingprocesses.Importantly,ABCviewsMed-Surgasabundledopportunity,whereaparticipantwouldneedtopartakeinbothmanufacturinganddistribution,anopportunityABCdoesnotfindattractiveatthistime.WeviewABCremainsinterestedinopportunitiesinternationally,withalsoincreasedfocusonitsspecialtyfranchise.■CardinalHealth(CAH,Expectationsremainlowfollowingastringofdisappointingoperationalresultsandarecentmanagementshift,andourcautiouslyconstructiveviewispredicatedoneffortstoputinplaceasetofancillarygrowthdrivers(e.g.Medical),albeitprogressingatasomewhatslowerpace.KeyareasofinterestasweheadintoFY20includeanupdateonapermanentCFOappointment,improvingperformanceatCordis,completingtheintegrationofPatientRecovery,continuingconversationswithbothupstreammanufacturersanddownstreamproviderpartnersinitsPharmasegment,aswellasre-evaluatingitsportfolioappropriately,discussedfurtherbelow.AsitrelatestoCAH'sMedicalsegment(27%ofest.2019operatingincome),weareproponentsofthecompany'sstrategicrepositioningintheory(implemented5-6yearsago)intothepresumablyfastergrowingandmoreprofitableproductsbusinessesasameanstodiversifyawayfromarelativelychallengedhospitalsupplyoperation,whereCAHwasformerlypurelydistribution-oriented,whichwecontinuetoviewasrepresentinganasset-heavy,slowergrowthprofileundergoingsustainedmarginpressureovertheLT.Wehighlightkeyfactorsimpactingthesegment’srecentperformance.Cordisintegration–PathwaytoProfitabilityPotentiallyCAHnotedinF3QthatitsCordisstabilizationprogramremainsontrack,whereithasexperiencedanotableimprovementinservicelevelsandfillrates,lowerbackorders,andincreasedcostdiscipline.Aspartofitsprogram,CAHwillreduceCordis’geographicexposurefrom~60to~45countries,evaluatingeachcountry’struegrowthpotential,coststructure,andrisks.Italsocontinuestooptimizeitsproductmix,havingalreadyreducedtheCordisSKUcountby20%.Thatsaid,managementremainsthoughtfulasitimprovestheunit’scoststructuresoasnottodisturbpotentiallybuildingsalesmomentum.ManagementexpectstheMedicalunitwillbeonaprofitablegrowthtrajectorybytheendofFY19(albeitnotentirelycleardisclosureonwhatthatentails),andareturntoyoygrowthinFY20.WeremainoftheviewthattheCordisacquisition,thoughclearlypresentingchallenges,willprovideafoundationoffofwhichCAHcanleverageitsinternationalsalesanddistributionassetstosellitsportfolio.Asareminder,Cordisisamanufacturerofcardiovascularandendovasculardevicesforminimallyinvasiveprocedures,with,importantly,OUSrevenuesatthetimeoftheacquisitionrepresenting~70%oftotalsales.Sinceitsacquisition,Cordisperformancehasclearlyfallenbelowexpectations,withchallengesincludingslowerthanexpectedgrowthinproductpartnershipagreements,inventorywritedowns,andahighercostbaseduetoglobalsupplychaininefficienciesandelevatedSG&Acostsinternationally.716JulyMedtronic’sPatient16JulyMedtronic’sPatientRecovery—SpeedbumpinInF3Q,CAHannouncedthatithassuccessfullyexitedtheprimaryTSAs,withonlyafewminorexitsstillongoing,andmanagementexpectstomeetaccretiongoalsfor2019.Thatsaid,itexperiencedsomeinternalsupplydisruptionsduringthequarter,likelyinrelationtotheexitofsomeTSAs,whichimpactedserviceslevelsnegatively,wherefillratesfellandbackordersincreased,drivinglostvolumeinthequarterandadownwardrevisiontoitsMedicalbusinessoperatingoutlookforFY19.Allin,thislatestsetbackintheMedicalunitwassurprising,whereCAHpreviouslyemphasizedasuccessfulintegrationprocessforthePatientRecoverybusiness,akeycomponentofitsdiversificationstrategy.Asareminder,inApril2017,CAHannouncedthe$6.1billionacquisitionof23Medtronicproductcategoriesacrosspatientcare,deepveinthrombosis,andnutritionalinsufficiency.Theproductshadcollectivesalesof$2.3billion(>70%US)forthetwelvemonthsendedOctober2016.Thedealwasexpectedtobeaccretivetoadjustedearnings,withanticipatedcashtaxbenefitsofatleast$100millionandoperationalsynergiesof>$150millionexpectedbytheexitofyearthree(FY20).RawMaterialsRemainaNTInF1H19,CAHnotedincreasedcostsfromrawmaterialprices,amongotherfactors,whichhavepressuredMedicaloperatingmargins,aphenomenonthatwilllikelycontinuethroughFYE19.Whilemanagementnotedencouragingdatapointsinspotmarketsforrawmaterials,potentiallypointingtofuturerelief,theseincrementallybetterpricestaketimetoflowthroughtheP&L(3-6months)duetoalaginmanufacturingandsupplychaincostaccountingdynamics.Therefore,thoughweareencouragedbyrecentcommentary,wedeemphasizepotentialmarginpressureabatementasitrelatestorawmaterialsinF2H.OtherAreasofFocusfor■Managementshifts–CFODeparture:OnJuly8,CAHannouncedCFOJorgeGomezwilldepartCAHeffectiveAugust9tobecomeCFOofDentsplySirona(XRAY,Outperform).CAH’scurrentCEOMichaelKauffmanwillassumetheadditionalroleofinterimCFOasitinitiatesaformalexecutivesearch.WhileKauffmanhadpreviouslyservedasCAH’sCFOpriortohisappointmentasCEO,suggestinghehasadequateexpertisetoeffectivelyperformtherole,investorswerebroadlysurprisedCAHdidnothaveanotherpersononthebenchtoactintheroleonaninterimbasis.Wealsonoteothermanagementchangesatthesegmentlevel,includingJonGiocomin’spromotiontoCEOoftheMedicalsegment,effectiveFeb2018,andtheappointmentofVictorCrawfordasCEOofthePharmaceuticalDistributionsegment,effectiveNov2018.CostStructureOptimization:CAHisundergoingacompressivereviewofitsoperatingstructuretodriveamoresustainableandefficientmodel,withthecompanyontracktoachievetargetedannualizedgrosscostsavingsinexcessof$100millioninFY19and$200millionbyFYE20.WhileCAHviewsitsinitiativesaretrackingaheadofinternalplans,itnotedthatsavingswerereinvestedtofixshort-termchallengeswithitsMedicalbusiness(PatientRecover,legacyCAHBrandedPortfolio),mitigatingthebenefitinF3Q.Asareminder,itsinitiallaborsavingsandpolicychangestookeffectinlateAugustandearlySeptember,withthebenefittorampupthroughouttheyear.Ofnote,CAHhighlightedthatitisestablishingazero-basedbudgetingstrategy.Re-EvaluatingitsPortfolio:Intermsofitslongertermgrowthstrategies,CAHisassessingitsbroaderbusinessmix(potentialexits,partnerships),reviewingandoptimizingitsbroaderplatformandassessingallofitsbusinessunits.RecentexamplesincludeCAH’sdivestitureofitsChinadistributionbusinessonFeb1,2018,aswellasitssaleofa55%stakeinitsnaviHealthbusinesstoprivateequityfirmClayton,Dubilier&Rice(CD&R).■■816July16JulyCVSContractRenewal:CAHanno