Issue 17 

Quarterly earnings season heads into its final weeks, with performance for the health care sector largely neutral to favorable from a ratings perspective. As the COVID-19 vaccination rate in the U.S. steadily climbs and effects of the pandemic lessen, patient procedures should continue to return to near normal volumes. This bodes well for health care service providers as well as manufacturers dependent on procedure volumes.

We expect more related positive rating actions in the near term, including revising outlooks to stable after they were revised to negative during the height of the pandemic in 2020. On the flip side, COVID-19 tailwinds for select industries should begin to dissipate in the second half of 2021, though we do not expect any negative rating actions as a result.

Quick Credit Takes On Earnings

AmerisourceBergen Corp. (A-/Watch Neg/A-2)

Analyst: Arthur Wong

Performance solid going into acquisition of Alliance Healthcare Services: 

• We expect pharmaceutical distribution volumes to continue to normalize, as patients resume preventative and diagnostic physician visits given the increasing vaccination rates and lower infection rates.
• The normalization in patient activity will be partially offset by reduced volumes associated with the pandemic, such as the distribution of COVID-19 therapeutics.
• Generic pricing deflation, whether it has accelerated, is a focus, as it would be a headwind. However, the company reports that generic pricing is as expected. This is consistent with the observations of other distributors, Cardinal Health Inc. and McKesson Corp.

Credit reflection:   Neutral. Operating performance and free cash flows continue to be solid, which will be key to AmerisourceBergen's ability to deleverage after acquiring Alliance HealthCare. We've indicated we will lower our rating on AmerisourceBergen to 'BBB+' upon completion of the acquisition, based on our expectation that leverage will decline below 2.5x within two years. We also indicated we would assign a negative outlook, on the possibility that deleveraging would be delayed and leverage would remain above 2.5x longer than two years. The recent quarter's performance is consistent with our expectations, which includes the estimated impact of a potential opioids litigation settlement and subsequent cash outflows. We also weigh in management's lengthy track record of financial conservatism (AmerisourceBergen has long been the lowest-leveraged of the major three U.S. pharmaceutical distributors) and execution.

Bausch Health Cos. Inc. (B+/Negative)

Analyst: Ji Liu

Revised spin-off plan leaves the company with over a turn higher leverage: 

• Performance was largely in line with expectations, but the quarter was overshadowed by the company's revised spin-off plans for its eye care business. Bausch reduced debt at the prospective spin-off, but that resulted in a larger debt load at the remaining entity (Bausch Pharma).
• Bausch Pharma will still have a sizable pharmaceutical portfolio, headlined by long-time lead product Xifaxan, which in our base case should be patent-protected through Jan. 1, 2028. But the firm will depend highly on Xifaxan (we estimate approximately 40% of Bausch Pharma's EBITDA). The rest of the portfolio is very diversified, though with inconsistent performance historically, and it was impaired by the COVID-19 pandemic. We also think the increase in the opening leverage could delay the timing for the company to conduct needed mergers or acquisitions (M&A) to refresh its portfolio.

Credit reflection:   Unfavorable. The company still has a lead product (Xifaxan), a large portfolio of diverse products, and strong cash flows for the rating. These are significant advantages over most 'B' rated health care companies. Leverage will be higher post spin-off, but Bausch has refinanced and pushed out maturities over the past several years, and leverage appears manageable. However, new products are needed, the internal pipeline is unproven, and the company's track record on M&A is mixed. Bausch appears to have some time, but we would like to understand the new management team's strategy for refreshing the portfolio in the intermediate term and its financial policy before determining the ultimate direction of the rating. Otherwise, a setback on Xifaxan's prospects could lead to a quick downgrade.

Cigna Corp. (A-/Stable/A-2)

Analyst: Francesca Mannarino

Evernorth drives a modest increase in the full-year earnings outlook:  

• Cigna raised its revenue and earnings outlook largely on the strength of its health care services business (Evernorth), at which organic growth in retail network and specialty pharmacy services bolsters revenue and supply chain initiatives enhance margins.
• It also increased the medical membership growth outlook for its U.S. medical business to "at least 350,000" (from 325,000), with full-year growth expected in the Medicare Advantage, individual, and commercial "select"/middle-market segments, partially offset by national account segment losses.
• Cigna maintained it its full-year medical loss ratio expectation of 81%-82% and noted COVID-19 cases and hospitalizations fell more rapidly than it expected in the first quarter. This was countered by higher non-COVID-19 medical utilization.

Credit reflection:  Favorable. Evernorth (launched in September 2020) is off to a good start. First-quarter revenue benefitted from the January 2021 expansion of its partnership with Prime Therapeutics into home delivery and specialty pharmacy services. Moreover, in April, Evernorth completed its acquisition of telehealth provider MDLive, which should help Cigna with its broader medical/pharmacy cost containment and consumer experience goals. We thought Cigna's callout on preventative care trends in its U.S. medical business was notable. In explaining why its non-COVID-19 utilization increased in the quarter, Cigna said preventative care utilization (mammograms, colonoscopies, etc.) by its commercial members was higher than the national average but still 10%-15% below pre-pandemic levels. Cigna said this was largely intentional and a positive, as higher spending on preventative care could mitigate higher-acuity cases later in the year (an industrywide concern). Similar to peers, Cigna continues to believe overall non-COVID-19 utilization will normalize in 2021.

Pfizer Inc. (A+/Stable/A-1)

Analyst: Tulip Lim

A $26 billion tailwind, but thoughts of a positive rating action are premature: 

• Sales of Pfizer's COVID-19 vaccine, BNT162, were the major headline in the company's first-quarter earnings release. It raised 2021 sales guidance to $26 billion for the vaccine, based on continued strong demand.
• Pfizer has arguably been the biggest winner on the COVID-19 vaccine thus far, raising production capacity several times and generating leading sales. After the earnings call, Pfizer further raised its production capacity to 3 billion doses from 2.5 billion and received U.S. Food and Drug Administration emergency approval for use with children 12-16 years old.
• In the non-COVID-19 business, Pfizer recorded a solid first quarter, with strong performance from Eliquis, and raised its 2021 sales estimates $200 million.

Credit reflection:   Favorable. We downgraded Pfizer to 'A+' late in 2020, mainly due to the lowered diversity following the divestiture of its legacy products business Upjohn (roughly $10 billion in revenues) and our expectation that leverage will remain 2x-2.5x. The COVID-19 vaccine restores some lost diversity and provides an opportunity to reduce leverage below 2x (based on increased EBITDA). However, we think it is premature to consider a positive rating action at this point. Questions remain:

• What is the longer-term contribution of the mRNA franchise (sales demand beyond 2021, pricing, sustained EBITDA, and potential expansion of the technology platform to other therapeutic categories)?
• What is the likelihood Pfizer can maintain adjusted net leverage under 2x, given what we believe is the industry's overall more aggressive financial policy to pursue pipeline-enhancing M&A?

Surgery Partners Inc. (B-/Stable)

Analyst: Jeffrey Loo, CFA

Solid performance with robust growth in joint replacement procedures and robotic surgeries: 

• Surgery Partners' volumes continue to recover as the pandemic eases, with first-quarter volumes above those from before COVID-19.
• The company completed a secondary equity offering in February, raising about $260 million in gross proceeds. This improved its liquidity position and will enable further capital investments, development, and acquisitions. It should improve its debt to EBITDA.

Credit reflection:   Favorable. Surgery Partners continues strong volume recovery, with deferred surgery cases returning as the COVID-19 pandemic eases across the country, helped by increasing vaccination rates. The trend toward medical procedures shifting to outpatient facilities from inpatient facilities continues. Patients are increasingly viewing outpatient facilities as safer and more convenient than hospitals, while insurance providers steer patients toward this lower-cost alternative. However, hospitals are also increasing their outpatient presence to capture and retain some of these patients.

Same-facility case volume rose 8.8% over the prior-year period, driving same-facility revenue up 17.1%. Higher-acuity cases continue to increase revenue per case, with joint replacements up 120% over the prior-year period, aided by a 65% increase in robotic surgeries. Overall, revenue increased 16.2% over the prior-year period. We anticipate continued strong volume over the coming quarters, but revenue per case will moderate as more lower-acuity cases return. Surgery Partners raised its 2021 adjusted EBITDA forecast to at least $320 million and projects 18%-20% revenue growth, which should improve cash flow. However, we still expect a cash flow deficit after distributions to noncontrolling interest.

Related Research

• The Health Care Credit Beat: Reflections On J&J, HCA, Thermo Fisher, And UnitedHealth Earnings – May 5, 2021
• Research Update: Bausch Health Cos. Inc. Outlook Revised To Negative Given Higher Opening Leverage Upon Spin-Off – May 4, 2021
• Surgery Partners Inc.'s Proposed Common Stock Offering Will Be Slightly Credit Positive; Ratings Unchanged – Jan. 27, 2021
• AmerisourceBergen Corp. Ratings Placed On CreditWatch Negative Following Announced Acquisition Of Alliance Healthcare – Jan 6, 2021
• Cigna Corp. Outlook Revised To Stable From Negative On Expected Decrease In Leverage; 'A-' Rating Affirmed – Dec. 21, 2020