OptumRx, The Hidden Gem In UnitedHealth Group’s Portfolio
Contributor since 2013 / 7178 Followers
Summary:
- UnitedHealth Group’s Q1 earnings highlight OptumRx’s exceptional performance and its growing significance in the company’s financials.
- OptumRx is utilizing big data analytics to unlock efficiencies, presenting a transformational moment in the PBM sector.
- Despite short-term stock underperformance, UnitedHealth Group’s robust financial performance and growth potential offer compelling reasons for investment.
FatCamera/E+ via Getty Images
The landscape of Pharmacy Benefit Management is changing, with the potential for significant investment opportunities. UnitedHealth Group’s (NYSE:UNH) Q1 earnings reveal that OptumRx, its PBM arm, is leading the way in this transformation. As we delve into the impressive performance of OptumRx, we will explore how the leveraging of data analytics for improved operational efficiencies, and a well-balanced business model is painting an encouraging picture for investors. The focus of this article is to present an investment thesis centered on the strength, competitiveness, and innovative strategies of OptumRx and the potential implications for UnitedHealth Group’s financial performance.
Q1 Shines Spotlight On OptumRX
UnitedHealth Group’s Q1 earnings surpassed market predictions, with exceptional performance coming from key divisions, specifically UnitedHealthcare (UHC), OptumHealth, and OptumRx. Revenue and operating earnings from these segments exceeded anticipations, contributing to a robust financial performance for the quarter.
The spotlight during this period was notably on OptumRx, with financial analysts dedicating their early queries to this unit. The attention was understandable given OptumRx’s impressive earnings. The segment reported a revenue of $27.4B, which substantially outperformed forecasts. This signifies the increasing value and importance of OptumRx within the UnitedHealth Group’s financials.
UnitedHealth Group’s recent Q1 earnings call provided a deeper insight into the operations of its Pharmacy Benefit Manager (PBM), OptumRx, painting an encouraging picture for investors. CEO Andrew Philip Witty and OptumRx Chief Executive Officer, Heather Rachelle Cianfrocco, underscored the indispensable role of the PBM in the healthcare ecosystem, emphasizing the company’s commitment to maintaining affordability and transparency in the marketplace. The executives emphasized their strategic approach to negotiate drug prices, highlighting OptumRx’s initiatives that help drive down costs and ensure a balanced market.
A notable highlight from the earnings call was OptumRx’s strong growth rate of 15% in the first quarter, demonstrating the portfolio’s competitiveness and its resilience amidst a challenging healthcare landscape. This impressive growth rate reflects OptumRx’s commitment to innovating the pharmacy model and continuously driving down costs, contributing positively to the company’s overall financial performance.
Moreover, around half of the revenues in the OptumRx portfolio come from non-PBM activities, which indicates a well-balanced business model. This diversity in revenue streams is beneficial to UnitedHealth Group’s overall financial stability and reduces its vulnerability to fluctuations in the PBM market. The company’s high client retention rate also signifies strong business performance and client satisfaction.
UnitedHealth Group’s management of GLP-1 drugs was another topic of discussion. The company reported an increase in the use of these drugs, mainly in diabetic care, but emphasized that the trend is well managed and within the expected range. Any significant changes in this area could impact the company’s financial outlook and will be monitored closely by investors.
Furthermore, the upcoming changes to the company’s prior authorization process, with the aim of streamlining processes and improving the consumer experience, signal an exciting area for the company’s growth. While these changes are expected to enhance customer satisfaction, the company will need to manage the cost implications effectively to prevent any negative impact on financials.
The recent earnings call suggests a positive outlook for UnitedHealth Group’s PBM business. Investors will likely be watching closely to see how the company continues to innovate, control costs, and adapt to market changes to drive growth and maintain financial stability.
Harnessing the Power of Big Data
The Q1 earnings report of UnitedHealth Group underscored the notable strides of OptumRx, its Pharmacy Benefit Management arm, in deploying data analytics to unlock cost efficiencies and enhance operational effectiveness. This shift towards data-driven decision-making in the PBM industry is revolutionizing traditional business practices, opening up new avenues for savings and competitiveness.
From an investor’s perspective, these developments underscore a transformational moment in the PBM sector. PBMs, once focused largely on supply efficiencies, are now harnessing vast troves of data to unearth more nuanced cost-saving opportunities and create more sophisticated business strategies. This transition potentially enhances the value proposition of PBMs like OptumRx, marking a shift from a mere cost-containment role to a more dynamic, value-adding participant in the healthcare value chain.
However, this transition also brings forth potential challenges. As PBMs exert greater influence over prescription decisions to control costs, they’re encountering increased regulatory scrutiny and legal challenges. Ensuring that all coverage decisions are medically appropriate and patient health outcomes remain a priority is crucial to mitigate these challenges.
Despite these hurdles, the broader trajectory suggests a growing role for data analytics in the PBM sector. The leveraging of data not only to manage costs but also to drive improvements in patient care quality is a significant industry trend. For investors, these developments may result in an increased valuation of PBMs, a stronger bargaining position with drug manufacturers, and an overall enhancement of the sector’s role in the healthcare ecosystem. As the largest managed care company, UNH is especially well positioned to leverage the power of big data.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
Our analysis of UnitedHealth Group comes from a comprehensive review of their recent earnings and financial trends. While UNH reported FY Q1 earnings that led to a 2.7% drop in stock value on the day after earnings, we believe this isn’t a reflection of the underlying strength of the company.
For instance, UNH’s revenue growth has been strong, with a CAGR of 10.2% over the past three fiscal years. Impressively, sell-side consensus is forecasting even further revenue growth of 12.4% this fiscal year, reaching $364.3 billion, and a growth of 6.9% the following fiscal year, reaching $389.2 billion. We consider this a robust sign of UNH’s ability to maintain a healthy growth trajectory.
Further strengthening our positive outlook is the fact that UNH’s EBIT margin increased by 0.6% points over the past three fiscal years, from 8.1% to 8.8%. Consensus expectations point to continued margin expansion, which should contribute positively to bottom-line growth.
Moreover, UNH’s approach to capital management, evidenced by its use of share repurchases to offset shareholder dilution and its moderate spending on share-based compensation (SBC), reflects a balanced strategy which is in the best interest of its shareholders. As a result of these strategies, UNH’s EPS has grown at a CAGR of 13.7% over the past three fiscal years, outpacing its revenue growth – an impressive feat in our opinion.
We’re also heartened by the improving trend in UNH’s free cash flow (FCF). Consensus estimates project FCF will reach $27,259 million this fiscal year, representing a 7.5% FCF margin, a significant increase from $16,149 million four fiscal years ago, which represented a 6.7% FCF margin. Over the past four years, UNH has shown a remarkable capacity to generate cash, with an average FCF margin of 7.3%. Its capital-light business model, with capex accounting for only 0.8% of revenue, supports strong free cash flow generation, underpinning the financial stability of the company.
Notably, UNH has demonstrated robust Return on Invested Capital (ROIC) at 15.9%, and with a net debt of $27.0 billion, it is reasonably levered at 0.8 times its expected current-year EBITDA of $36.0 billion. The dividend yield of 1.4%, though slightly below the S&P 500’s average, contributes to the overall attractiveness of the stock.
Looking at the current stock price of $478.82 per share, UNH has a market value of $445.8 billion and an enterprise value of $472.8 billion. Though the stock underperformed the S&P 500 by 6% points over the past year and is currently trading below its 200-day moving average and 14% below its 52-week high, we believe this provides a potential buying opportunity.
Given the low short interest of 0.6%, there is a limited risk of a short squeeze, which in our view, further strengthens the investment case for UNH. Based on consensus estimates on FactSet for next year’s results, UNH’s current valuation multiples seem quite reasonable: an EV/Sales multiple of 1.2, an EV/EBIT multiple of 13.3, a P/E multiple of 17.0, and an FCF multiple of 16.4. When compared to the S&P 500, UNH is trading at a significant discount on EV/Sales and EV/EBIT, a slight premium on P/E, and a discount on FCF. Given UNH’s strong financial performance, these multiples suggest the stock could be undervalued at current levels. Furthermore, UNH’s FY2 PEG ratio stands at 1.4, a discount of 9.1% compared to the S&P 500’s PEG ratio of 1.5. This indicates that the stock might offer better value given its growth prospects.
Using consensus estimates and historical pricing data from FactSet, UNH’s current rolling forward 12-month P/E ratio of 18.3 is slightly lower than its 5-year mean of 18.8, and well within its 2-standard deviation range of 14.1 to 23.5. This indicates that the company’s valuation is within a reasonable range compared to historical norms. So, the current stock price might be seen as fairly valued when considering its historical averages.
Furthermore, we note that UNH trades at a premium valuation relative to peers. UNH’s forward 12-month P/E of 18.3 is higher than ELV’s 13.2, CI’s 9.8, and HUM’s 17.3. We believe these premiums reflect its superior financial performance and robust growth prospects.
Despite the short-term underperformance, we remain bullish on UNH. The company has demonstrated strong financial performance and growth potential. The current dip in stock price, in our view, provides an attractive entry point for long-term investors. We believe UNH’s robust fundamentals, coupled with a relatively attractive valuation compared to the S&P 500 and its own historical averages, offer compelling reasons for investment. As always, investors should assess their risk tolerance and investment goals before making investment decisions.
Conclusion
UnitedHealth Group, driven by the exceptional performance of OptumRx, presents an intriguing case for investors. The innovative use of data analytics, a diversified business model, and strategic drug price negotiations all contribute to a promising future. Despite potential hurdles, such as increased regulatory scrutiny, the broader trend suggests a growing role for data analytics in the PBM sector. For investors, this means an opportunity for increased valuation of PBMs, stronger bargaining positions, and an overall enhancement of the sector’s role in healthcare.
Despite its recent underperformance, UnitedHealth Group’s stock remains an attractive investment proposition, given the company’s strong fundamentals, its resilience, and growth potential. As the company continues to innovate and adapt to market changes, we believe that UnitedHealth Group presents a compelling long-term investment opportunity. This view is underpinned by the strength of OptumRx, its strategic approach towards handling market changes, and its dedication to providing value to all stakeholders. As always, investors are advised to consider their personal investment goals and risk tolerance when making decisions.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.