Month: March 2019

· Yesterday the European Parliament passed the EU Copyright directive (see original email from Sept. below) which is primarily targeted at Google and Facebook.

· The directive includes 2 key articles – Article 11 (the ‘link tax’) and Article 13 (the ‘upload filter’). The Link Tax gives publishers the right to charge for linking to their content and the Upload Filter would put the obligation on platforms to identify what is copyrighted by making them liable for copyright infringement. Commercial deals with publishers would be required in order for Google to show hyperlinks and short snippets of news.

· Those in favor (content creators) say it protects their product, giving publishers a negotiating edge w/ Google and Facebook. Those against it say it limits the free access of the internet. Part of the concern is that the directive is vague and it’s difficult to precisely filter out what’s copyrighted and what’s not – the result may be over-blocking content in an effort to limit the risk of an infringement. The wording of the directive is apparently ambiguous enough that the impact it will have is not entirely clear and may become more clear in the future – countries may interpret the directive differently.

· User generated content on places like YouTube and Facebook would need to be filtered. Google already does this to an extent on YouTube.

· Google News would need to license all the content that shows up in search results. Google put out the screen shot below of what News search results would look like without licensing.

· Google says “we built Google to provide everyone with equal access to information”…”Article 11 means that search engines, news aggregators, apps, and platforms would have to put commercial licenses in place, and make decisions about which content to include on the basis of those licensing agreements and which to leave out.” As a result, Article 11 would mean Google is picking winners and losers based on who they establish commercial agreements with (likely the largest publishers).

· The revenue impact to Google should be limited. EMEA is about 1/3 of revenue. Ad revenue from relevant news sites in Europe is a small subset of that. Importantly, these same publishers make money by traffic landing on their sites via Google by selling ad space through Google’s AdSense product. The larger consequence may be more around limiting news results.

$GOOGL.US

[tag GOOGL]

From: Sarah Kanwal
Sent: Friday, September 14, 2018 12:33 PM
To: ”
Cc: CrestwoodAdvisors <crestwoodadvisors>
Subject: EU Copyright Directive

· The EU is on a path to create copyright laws aimed at helping publishers of content (e.g. journalists, musicians etc.) get a bigger piece of ad revenues that go to companies like Google and Facebook.

· The EU parliament voted in favor of the directive a couple days ago, but there are several more steps for this to pass.

· The new rules would give publishers the right to ask for paid licenses when a platform shares their stories (i.e. Google News) or video clips. Some are calling it a “link tax." The rules would also put the obligation on platforms to identify what is copyrighted by making them liable for copyright infringement.

· The implications aren’t entirely clear yet. For example, the rules would apply to “commercial platforms” but it’s not clear whether that applies to blogs etc., which would widen the impact.

· Other countries like Spain and Germany tried similar rules in the past and they failed. Google’s response was either to shut down Google News or just remove any news sources that wouldn’t give it free access…which meant traffic to those sites collapsed.

· The regulation might actually reinforce the dominance of the strongest players. The cost burden of this regulation would be easier for large firms like Google to absorb as it would require firms to build technology to identify and filter copyrighted content. Thus it might have the unintended consequence of strengthening Google (and other platform giants) relative to smaller firms/startups. In fact, Google already largely complies with these rules on YouTube with their “Content ID” filter.

· Opponents also say that complying with these rules would limit the free access of information that the internet is designed to offer.

· If this directive keeps progressing their will likely be more vocal industry resistance, as many who have been critical of the big tech firms don’t support it. For example, Tim Berners-Lee (inventor of the world wide web), who has spoken widely about the risks of Google’s and Facebook’s dominance, is ardently against these potential regulations.

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Adam Fein (Drug Channels well-known author) published his predictions for a world without rebates this morning. The summary is below:

Continue reading “A world without rebates…”

Below is an update on where we stand on CVS, and why the stock has been under pressure recently:

1. Omnicare underperformance: while we were hoping for this turnaround to take place, CVS ended up writing down a big piece of this long-term care business in 4Q18. This puts pressure on CVS to successfully integrate Aetna and execute on their synergies and strategic vision.

2. Democrat’s push for a “Medicare for All Act of 2019” bill that would replace almost all private health insurance. The measure would push all Americans (even under 65) towards a Medicare program within 2 years. Premiums, deductibles and co-pays would disappear, and guarantee a universal health care system. Medicare would dictate doctor’s fees and drug prices. No details on how much this would cost or how it would be funded… CVS’s stock however went down with the news… We think this bill is unlikely to pass.

3. The PBM model is under pressure as new legislations are being discussed:

· The Human Health Services issued a proposed rule to remove the safe harbor for drug rebates (on the government side of the business) currently permitted for Medicare and Medicaid managed care, which would directly impact PBMs. The rule would also create two new safe harbors for (1) discounts provided to the consumer at point-of-sale and (2) flat, fixed service fees paid by manufacturers to PBMs. PBMs have stated in the past that they do not keep any rebates earned under government programs, as this compensation is disclosed to CMS and reflected in plan bids in the form of lower Medicare Advantage and Medicare Part D premiums and lower Medicaid managed care plan bids.

· “The Drug Pricing Transparency Act” would force PBM in the commercial market to pass rebates to the patient directly (point-of-sale rebate). Other proposed changes are included in the bill, such as: utilizing an international pricing index in Part B, direct negotiation of drug prices by Medicare, etc… The details and impact of this bill on the supply chain economic model are still unclear at this time. CVS already offers that option, with increased acceptance in 2019 from the healthcare insurance participants. CVS only kept $300M worth of rebates (less than 3% of its 2018 EBIT).

Rebates have been a great tool used by PBMs to offer an attractive service package to their clients, and recently less of a way to make profits (profit margins are very low vs. pharmacy/managed care profits).

Valuation:

Today’s stock price for CVS reflects the above challenges. Our DCF model shows that today’s price only account for 2 segments out of 3: the retail pharmacy (stores and pharmacy business) and the Aetna segment. Even the recently negotiated 5 year PBM contract with Anthem would disappear. The PBM segment would go to zero in 2020, with the rest of CVS’s business growing at a 1% rate thereafter.

Here’s where we disagree:

· Pharmacy sales continues to grow nicely, not just due to higher drug prices (which has slowed down in 2018), but also due to higher script volume (average growth of 4% in past 7 years).

· PBM segment is unlikely to radically disappear in 2020. We could see margins contract as the government steps in, but levels are already very low (~3.5%). Also we can’t forget the power of lobbyists.

· Rebates profits are small for CVS, and we believe companies like CVS could play a role in regulating pharma prices even more. We think the main issue with drug prices does not lie solely with the PBM model but with a broader patent and FDA laws issue. By allowing Pharma to hold patents for decades, new cheaper alternatives are left out of the market place, allowing them to raise prices without competition. Recently though, Pharma companies have been trying to gain some goodwill by cutting prices or launching new generics.

· Anthem is to provide an estimated $3.8B in sales in 2019 in its first year in place, then $11B in 2020, and $62B in 2021 as the contract matures. Total PBM revenue in 2018 were $134B, so Anthem is not a negligible customer.

So in conclusion, while CVS has been under tremendous pressure, we advocate for remaining patient with this name. We continue to like its long-term thesis of vertical integration and solutions provider to clients, such as its MinuteClinic proposition and new HealthHub store format (see video below).

https://cvshealth.com/thought-leadership/cvs-health-testing-new-healthhub-store-format

$CVS.US

[tag CVS]

Julie S. Praline

Director, Equity Analyst

Direct: 617.226.0025

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com