Three Key Takeaways From Healthcare Earnings Season

As the initial wave of healthcare companies unveil quarterly results, here are three takeaways from earnings calls.

1. Drugmakers are rethinking pricing strategies

After Pfizer Inc. (PFE) earlier this month said it would defer price hikes, Novartis AG (NVS) said Wednesday, July 18, it will not raise prices for the rest of the year. On the earnings call, Novartis CEO Vas Narasimhan said the decision was a prudent one, citing the "dynamic environment."

But as Raymond James & Associates Inc. analyst Elliot Wilbur pointed out, Novartis' move essentially will not have any effect on the company's business, since it "only really increases prices in January." Novartis' announcement is like "cancelling scheduled ice fishing trips during the months of July-August," Wilbur wrote in a note.

Nevertheless, the analyst thinks the move could signal a more sectorwide restraint in price increases.

Word of Novartis' decision came after Pfizer said on July 10 it would defer price hikes that were scheduled to be effective on July 1 after a discussion with President Donald Trump, who had earlier slammed Pfizer and others, tweeting July 9 that they "should be ashamed" for increasing prices "for no reason." The president thanked both Novartis and Pfizer for not raising prices in a tweet Thursday.

Thank you to Novartis for not increasing your prices on prescription drugs. Likewise to Pfizer. We are making a big push to actually reduce the prices, maybe substantially, on prescription drugs.

— Donald J. Trump (@realDonaldTrump) July 19, 2018

Discussing healthcare costs and drug pricing on Johnson & Johnson Inc.'s (JNJ) earnings call Tuesday, chairman and CEO Alex Gorsky noted that medicines account for 14% and medical devices represent 6% of total healthcare costs in the U.S.

"The remaining 80% is accounted for by areas outside of our industry," Gorsky said.

He said Johnson & Johnson is working with partners in the healthcare system "to transform the way healthcare is paid for, so everyone involved is held accountable and rewarded for the value they deliver."

For his part, John Prince, CEO of UnitedHealth Group Inc.'s (UNH) pharmacy services business OptumRx, said on a Tuesday earnings call that the company focuses on initiatives that bring down the list price and net cost of drugs.

Prince pointed to moves such as UnitedHealth's March announcement that it will pass along rebates from drugmakers to customers, which will impact more than 7 million people enrolled in the company's fully insured commercial group benefit plans.

He added that the during drug negotiations, the company focuses on encouraging pharmaceutical companies to lower the list price of medicines.

As more companies report quarterly results in the weeks ahead, we likely will see more discussion on healthcare costs and how companies are trying to contain them, CFRA LLC analyst Jeffrey Loo said.

2. Companies are selective about pursuing M&A

Fielding a question about Johnson & Johnson's interest in medical device deals, Gorsky said the company continues to be interested in "value-creating inorganic growth opportunities in medical devices."

Meanwhile, Abbott Laboratories (ABT) is unlikely to make a major acquisition any time soon. Chairman and CEO Miles White said on an earnings call Wednesday that he doesn't have "big M&A on the radar screen," adding that Abbott will continue to pay down debt it had taken on for its $23.6 billion purchase of St. Jude Medical Inc. and its $4.5 billion acquisition of Alere Inc.

Following the two deals, Abbott had about $28 billion in gross debt. The company expects to pay down a total of $8 billion this year.

White said there are areas in medical devices where the company might opportunistically make an addition to its portfolio.

"But I don't think anybody should be holding their breath waiting for a great big move here," he added.

3. Abbott's Libre is on track for more than 1 million users by year's end

Sales in the diabetes care segment of Abbott's medical device unit grew nearly 40% on a reported basis and 33.6% on an organic basis year over year to $470 million in the second quarter, fueled by FreeStyle Libre, the Abbott Park, Ill.-based company's sensor-based continuous glucose monitoring system.

The device has more than 800,000 users globally, White said on the earnings call.

"We're on track with where we want to be in terms of patient acquisition and growth," he said.

Abbott expects the device to have more than 1 million users by year's end. The company launched the system in Europe in 2014, and the device clinched approval from the U.S. Food and Drug Administration in September. The company in January announced the product had obtained Medicare reimbursement from the Centers for Medicare & Medicaid Services.

UnitedHealth and Abbott are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Cramer buys or sells UNH or ABT? Learn more now.

More from Earnings

How Alibaba Earnings and Jerome Powell's Jackson Hole Speech Could Move Markets

How Alibaba Earnings and Jerome Powell's Jackson Hole Speech Could Move Markets

Here Comes a Tesla Roadster and a New Stock Market Record: Week Ahead

Here Comes a Tesla Roadster and a New Stock Market Record: Week Ahead

Chip Stocks May Have Sold Off Too Much On Recent Spate of Bad News

Chip Stocks May Have Sold Off Too Much On Recent Spate of Bad News

Nordstrom Shares Sizzle on Earnings Release, Raised Guidance

Nordstrom Shares Sizzle on Earnings Release, Raised Guidance

Nvidia Analysts Brush Off Crypto Fears, See 'Buying Opportunity'

Nvidia Analysts Brush Off Crypto Fears, See 'Buying Opportunity'