Issue 16 

First-quarter earnings for the health care sector so far are mostly favorable for ratings. Johnson & Johnson reported strong performance from its medical device business, indicating continued recovery of elective procedure volumes from the COVID-19 pandemic. Early indications are that favorable trends from COVID-19 benefited life science, diagnostics, and lab companies come from increased demand for testing. We expect that will begin to dissipate toward the second half, reflecting U.S. progress on emerging from the pandemic, such as faster-than-expected vaccination rates.

While demand for certain health care products will drop off, we do not see it as a negative. We largely have not incorporated the benefit as an upside in our ratings.

Our quick thoughts on several of rated health care companies:

Quick Credit Takes On First-Quarter Earnings

Johnson & Johnson (AAA/Negative/A-1+)

Analyst: David Kaplan

Improved performance in medical devices reflects ongoing recovery in procedures, solid performance in pharma  

• The company's medical device segment enjoyed strong performance in the first quarter, as patient procedure volumes continued to recover. Still, COVID-19 infection and hospitalization rates could reduce procedure volumes and medical device demand. Longer-term concerns on unemployment and patient willingness remain.
• Its COVID-19 vaccine, approved for emergency use in February, contributed minimally to sales for the quarter. The U.S. Food and Drug Administration recently lifted its pause in the administration of the vaccine in the U.S. It had been halted due to rare cases of blood clots. However, we do not expect vaccine sales to be a major contributor from a ratings standpoint.

Credit reflection:   Favorable. Johnson & Johnson's pharmaceutical segment continues to perform, largely unaffected by the pandemic and improvement in the consumer segment. Medical device segment performance was solid, reflecting the continued recovery in procedure volume. However, our outlook on the ratings is negative because of potential long-term leverage above 1.2x, given possible opioid litigation settlement and acquisition activity.

HCA Healthcare Inc. (BB+/Stable)

Analyst: David Peknay

Very strong first-quarter results, raised guidance for 2021 

• HCA, like its peer group of hospital companies, continues to recover from the pandemic as patient volumes improve, though they are still behind pre-COVID-19 volumes. Cases remain significant, accounting for 10% of total admissions in the first quarter.
• HCA resumed its long-term share repurchase program and reinstated its quarterly dividend program.

Credit reflection:   Favorable. HCA's results were strong despite still-depressed patient volume. Same-facility-equivalent admissions in the first quarter were 6.5% below the same period in 2020, but net revenue per equivalent admission increased 16%. This was possible due to significantly higher acuity and a favorable payer mix shift. Patients returning to hospitals tend to have higher acuity while elective procedures, which tend to have lower acuity, are slower to return. Moreover, commercially insured patients increased relative to the patient total. Also contributing to results are the company's aggressive cost-control efforts. The increase in guidance was due to better than expected results and the extension of the deferral of sequestration reductions through the end of the year. We expect HCA to continue to perform well and closer to historical, pre-pandemic net revenue per equivalent admissions and patient mix.

Thermo Fisher Scientific Inc. (BBB+/Positive/A-2)

Analyst: Alessio Di Francesco

Have capacity, will deploy 

• Favorable COVID-19 trends continue to lift performance across all of Thermo Fisher's main business segments. Demand for life sciences products, diagnostics, and laboratory supplies to support COVID-19 testing and vaccine production remain strong and will likely continue through 2021.
• Thermo Fisher's capacity for debt-financed acquisitions at the ratings built for the past couple of years due to continued strong performance and the absence of large acquisitions for the normally acquisitive company. The outperformance over the past several quarters stemming from strong demand further added to the capacity and led us to recently revise the outlook to positive from stable.

Credit reflection:   Favorable. The acquisition of PPD Inc. is a bold move, as it enters Thermo Fisher into a new, highly competitive business. On reflection, the acquisition may not be that surprising because it is consistent with the company's strategy to broaden its products and services to pharmaceutical clients (e.g., the $5.8 billion acquisition of contract pharmaceutical manufacturer Patheon in 2017). We expect the COVID-19 pandemic lift will begin to taper next year, already reflected in our rating and outlook. The positive outlook on the announcement of the proposed $17 billion acquisition of PPD indicates Thermo Fisher's significant debt capacity and track record of executing and deleveraging after acquisitions. An upgrade is likely within the next 24 months if we believe Thermo Fisher has reduced its acquisition-related financial and execution risks and we continue to expect the company to generally maintain long-term adjusted debt to EBITDA of less than 3x even after the pandemic.

UnitedHealth Group Inc. (A+/Stable/A-1)

Analyst: James Sung

Raised full-year earnings outlook driven by solid first-quarter results  

• UnitedHealth Group Inc.'s (UNH) first-quarter revenue increased 9% and operating income 35% year over year, with both the health insurance business (UnitedHealthcare) and health care services business (Optum) performing well.
• UnitedHealthcare's revenue growth came from membership growth of over 1 million during the quarter (led by the Medicare Advantage and Medicaid segments). Earnings benefitted from modestly better-than-expected medical costs (reflected by a medical loss ratio of 80.9% compared with its full-year expectation of 82.5%-83.5%).
• Optum's revenue growth was highlighted by OptumCare's 31% revenue growth per customer (driven by growth in members served in fully capitated contracts and an increase in higher acuity services provided), while earnings growth was highlighted by OptumInsight's productivity gains, which enhanced operating margins.
• UNH noted no status change relating to its pending acquisition of Change Healthcare Holdings Inc., which it expects to close in the second half.

Credit reflection:   Favorable. UNH is the largest and best diversified player in health insurance and health care services. We believe its strong operating results reflect these strengths, as its balanced business provides some insulation against business-specific risks (such as Medicaid reimbursement pressure in certain states) and regional risks (such as COVID-19 infection trends) that may affect other companies more. In terms of risks, UNH maintained its posture that the COVID-19 pandemic still represents roughly a $2 billion earnings headwind for 2021. We view UNH's conservatism as prudent and well informed given its exposure to a wide array of products and services and geographic markets. UNH said that while it hasn't seen a significant utilization uptick or increase in higher acuity cases/claims, it still believes this could occur in the second half.

Related Research

• Thermo Fisher Scientific Inc.’s Planned Acquisition of PPD Inc. Will Mark Its Entry Into The Competitive CRO Industry – April 15, 2021
• Thermo Fisher Scientific Outlook Revised To Positive On Stronger-Than-Expected Credit Metrics; ‘BBB+’ Ratings Affirmed – March 24, 2021
• UnitedHealth Group ‘A+’ Rating Affirmed Following Announced Acquisition of Change Healthcare; Outlook Stable – Jan. 8, 2021
• Full Analysis: Johnson & Johnson – Nov. 6, 2020
• Johnson & Johnson Outlook Revised To Negative On Rising Leverage, Litigation Risk; ‘AAA’ Issuer Credit Rating Affirmed – Oct. 28, 2020