Morningstar | Anthem's 2Q Characterized by Weak MLR, but Launch of PBM Is Tracking Ahead of Expectations
Narrow-moat Anthem posted second-quarter results that largely tracked our full-year estimates. We don’t anticipate a substantial change to our $306 fair value estimate as we update our model. We view shares as only slightly undervalued after today's mid-single-digit sell-off.The firm reported strong revenue growth that surpassed consensus expectations, helped by better-than-anticipated membership growth in Medicare Advantage and a commercial risk segment that held up well compared with enrollment losses seen in the first half of 2018. In Medicare Advantage, the firm has seen membership growth of roughly 16% year to date, far outstripping market growth that has trended close to 5.5% over the period. Consolidated medical enrollment growth continues to track our expectations, and management bumped up the outlook for its risk book by about 100,000 members for the full year.
While the top line continues to perform well, Anthem felt many of the same cost pressures as reported by peer UnitedHealth last week. Notably, both firms saw an increase in their medical loss ratios, or MLR, with Anthem posting a ratio over 100 basis points worse than our projection. Management called out an inadequate rate environment within a handful of its Medicaid states as the primary driver of weakness year to date and bumped the midpoint of its MLR guidance by roughly 15 basis points. This implies some moderation in the rate of increase for this metric in the second half of this year relative to 2018.
Despite MLR pressure, the firm's roll out of its pharmacy benefit manager, IngenioRx, seems to be tracking ahead of plan with the PBM driving the bulk of the $0.10 increase to full-year EPS guidance. Additionally, the firm signed the Blue Cross of Idaho as IngenioRx's first external pharmacy customer. We don't expect third-party PBM sales to be material for the next several years, but landing an early contract provides some support for the value Anthem aims to bring to the marketplace.
Anthem is an insurance holding company. Through its subsidiaries, the company is a health benefits company, serving medical members through its affiliated health plans. The company has three segments: Commercial & Specialty Business, which provides fully-insured health products, managed care services to self-funded customers, and other insurance products and services; Government Business, which includes Medicare and Medicaid businesses, its subsidiary, National Government Services, and services provided to the federal government in connection with its Federal Health Products and Services business; and Other, which includes pharmacy benefits management business and integrated health services business.
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