The Outlook | Sector

Spotlight
Tobin & McCullough: The Outlook For
Health Care Stocks

November 12, 2020

Hedgeye Health Care

Tom Tobin, Managing William McMahon, Analyst, Justin Venneri, Director,
Director, Health Care Health Care Primary Research
Ttobin@Hedgeye.com Wmcmahon@Hedgeye.com Jvenneri@hedgeye.com
@HedgeyeHC @HedgeyeMed
© Hedgeye Risk Management LLC
© Hedgeye
© Hedgeye
Risk Management LLC.
Risk Management LLC.
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 Health Care Position Monitor
For Week of November 9, 2020
Best Ideas - Longs Mkt Cap Best Ideas - Shorts Mkt Cap
Price Trend Tail Price Trend Tail
LONG ($B) SHORT ($B)
Active Longs Active Shorts
ONEM 1Life Healthcare, Inc. $ 31.48 $4.0B √ √ EXAS Exact Sciences Corporation $ 123.97 $19.7B × ×
TXG 10x Genomics Inc Class A $ 147.70 $11.5B √ √
AMN AMN Healthcare Services, Inc. $ 63.05 $3.0B √ √
GH Guardant Health, Inc. $ 112.96 $11.3B √ √
TDOC Teladoc Health, Inc. $ 206.14 $29.8B √ √

Long Bias Short Bias

NTRA Natera, Inc. $ 82.08 $6.9B HRC Hill-Rom Holdings, Inc. $ 92.62 $6.2B
ILMN Illumina, Inc. $ 308.16 $45.0B MASI Masimo Corporation $ 254.94 $14.0B
NEO NeoGenomics, Inc. $ 40.66 $4.5B AMWL American Well Corporation Class A $ 30.41 $6.0B
NVTA Invitae Corp. $ 44.76 $7.9B

Note
Active Longs/Shorts are high conviction ideas that we’ve either presented a Black Book for already or have one in the works (similar to other Hedgeye teams). Bench or Bias ideas are ones in which we’ve done the bulk of the
work, but there may be another question we need to answer to move it over the line. All active positions are higher conviction than bench ideas. We rank active versus active and bench versus bench.

Disclaimer
Hedgeye’s “bias” represents Hedgeye’s outlook on companies currently under Hedgeye’s review, or for which timing is not right for greater coverage. Hedgeye may or may not provide further commentary on any or all
companies represented on the bench and representation of a company on the bench does not forecast whether Hedgeye will or will not issue any additional material on that company.

Data Source: Hedgeye © Hedgeye Risk Management LLC. 3

 Microquad | Model vs Actual
Microquad – Generic Growth Curve Progression Microquad - The Four Quadrants

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 4
 Microquad | Model vs Actual
Microquad – Generic Growth Curve Progression Microquad – Actual Performance vs Growth Curve
4.00 8.00

3.00
6.00

NTM Sales Estimate Growth Factor z-score

2.00
4.00

1.00

Performance 1M
2.00

0.00

0.00

-1.00

-2.00
-2.00

-4.00
-3.00

-4.00 -6.00

Estimate Trend Performance 1M

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 5
 Estimate Revision Trend is Decelerating
Past the peak for the post-COVID19 recovery
We transform the next twelve-month
revenue estimate (NTM) across our
universe of Healthcare companies into 2
vectors that describe growth and
acceleration.

The output employs a standardized

Recovery #Slowing  method to describe and compare
estimate trends for revenue, EBITDA, and
EPS.

This chart displays the average of the

estimate trend across our Healthcare
universe and assigns a one of 4
microquads based on the +/- positioning
of the two factors.
Peak COVID19  After a sharp Microquad4 downturn, the
impact from COVID19 peaked on
4/16/2020, marking the beginning of the
fundamental recovery.

As of 11/5/2020 has transitioned into

Microquad 3, lower probability of
positive performance and lower average
performance compared to Microquad 2.

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 6
 Price Index
Past the peak for the post-COVID19 recovery?
We transform the next twelve-month
revenue estimate (NTM) across our
universe of Healthcare companies into 2
vectors that describe growth and
acceleration.

The output employs a standardized

method to describe and compare
estimate trends for revenue, EBITDA, and
EPS.

This chart displays the average of the

estimate trend across our Healthcare
universe and assigns a one of 4
microquads based on the +/- positioning
of the two factors.

After a sharp Microquad4 downturn, the

impact from COVID19 peaked on
4/16/2020, marking the beginning of the
fundamental recovery.

As of 11/6/2020 performance has been

increasingly volatile.. On average,
performance metrics deteriorate in
Microquad3, although results differ
across Macro Quads.

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 7
 Microquad Screen | November 6, 2020
Microquad1 Microquad2 Microquad3 Microquad4
AMGN A ICUI SEM ABBV EW MTD TMO BDX
EHC ALGN ILMN STAA ABMD GILD NEOG TNDM BIOS
HAE AMN ISRG STE ABT GMED NTRA WST CHE
HMSY BAX LLY SYK AMED HOLX OPK GH
HRC CERN MDT TECH ANTM IDXX PKI NEO
LHCG COO MMSI TFX BIO IQV PODD VRTX
PRGO ENSG MRK TXG BSX IRTC PRAH
RCM EXAS NVTA UNH CNMD JNJ Q
GKOS OMCL VEEV CRL LH QDEL
HCA PDCO WAT CVET LVGO REGN
HUM PEN ZTS DGX MASI RGEN
IART RMD DXCM MEDP TDOC

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 8
 Position Monitor | November 6, 2020
Sigma Positioning - Current Sigma Positioning – Current Universe Average

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 9
 Prospective Performance
Microquad average returns based on revenue estimate vectors

POSITION MONITOR 11/6/2020 Performance Sales

Expected 1M
Performance 1W Performance 1M Expected 1M
Ticker Name Price EV MCAP Performance Correlation 1st 2nd Sales Quad
Actual Actual Performance
Forward

ONEM 1Life Healthcare, Inc. 28.21 3290.84 3561.03 11.59% 5.11% 1.14% 1.33% 0.34 0.41 -1.69 3
TXG 10x Genomics Inc Class A 136.90 13211.60 10684.47 7.89% -2.84% 3.15% 1.56% 0.87 0.65 0.17 2
TDOC Teladoc Health, Inc. 196.46 16242.56 16573.04 4.93% -6.93% 2.94% 2.07% 0.94 0.95 -3.42 3
LVGO Livongo Health, Inc. 139.77 13608.34 14198.59 0.00% -1.38% 0.80% 1.23% 0.96 0.63 -2.48 3
NTRA Natera, Inc. 67.26 5023.76 5653.50 22.03% 14.96% 2.87% -0.72% 0.92 2.08 -1.01 3
ILMN Illumina, Inc. 292.70 41900.60 42839.69 5.28% -7.68% 3.64% 2.57% 0.93 0.23 3.60 2
GH Guardant Health, Inc. 106.66 9402.46 10625.14 5.91% 5.15% 1.27% 1.67% 0.70 -0.36 -0.01 4
AMN AMN Healthcare Services, Inc. 65.28 4109.57 3067.35 -3.42% 0.06% 1.93% 3.51% 0.82 0.03 2.12 2
EXAS Exact Sciences Corporation 123.83 19041.27 19692.62 0.11% 14.38% 1.33% 1.57% 0.80 0.03 0.89 2
HRC Hill-Rom Holdings, Inc. 91.07 7899.16 6065.81 1.70% 4.07% -0.18% 2.41% 0.95 -1.20 2.57 1
MASI Masimo Corporation 223.82 12350.50 12322.46 13.90% 5.76% 1.13% 2.47% 0.97 0.35 -1.11 3
AMWL American Well Corporation Class A 25.81 6484.91 5114.62
NVTA Invitae Corp. 39.21 4963.28 5816.68 14.15% -15.28% 7.67% 2.42% 0.83 2.46 0.11 2

The sigma chart coordinates for growth/acceleration (1st and 2nd Derivative of the estimate trend) is associated with a forward price
return over the following 1M and 3M. For each of our Position Monitor stocks, we’ve calculated the average forward return within 0.5
STDEV of the stocks most recent estimate growth(x) and acceleration(y) coordinates. We also compare the actual and expected
stock performance over the trailing 1 month to look for instances of over or undershooting the probable outcome.

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 10
 Positive Revision Trends
Top 20 revenue revision trends
• The Microquads start with
revision trends in the short
Sales Microquad term.
Sales
Rank Ticker Market Cap Estimate Growth Acceleration Expected 1W-Return 1M-Return 3M-Return 1Y-Return
Correlation
Change Return • Estimates have been
1.95%
trending higher for TDOC in
1 QDEL 11,739.81 91% 19% 1.14 -3.20 6% 2% 23% 382%
2 ALGN 33,200.43 79% 15% 1.78 0.34 2.04% 12% 46% 58% 85%
recent weeks.
3 PEN 9,258.09 93% 14% 0.72 0.82 1.04% -4% 21% 8% 45%
• TXG positive revision likely
4 WST 20,429.01 99% 13% 1.86 -1.99 2.22% 9% 2% 11% 100%
tied to the closing of
5 LVGO 13,608.34 96% 13% 0.63 -2.48 0.91% 0% -1% 15% 472%
recent acquisitions.
6 PKI 16,317.53 92% 12% 1.42 -2.07 0.50% 9% 11% 19% 62%
7 MOH 9,956.61 39% 11% 1.15 -2.22 1.59% 16% 8% 14% 77% • In line with Dental Macro,
8 ARAY 381.96 34% 11% 0.83 3.47 1.96% -1% 1% 10% 1% ALGN revisions have been
9 OPK 2,497.06 73% 9% 1.02 -2.87 2.06% 3% -20% -33% 141% positive post earnings
10 BEAT 1,674.30 81% 9% 0.65 0.88 1.08% 5% -1% 4% 1%
upside.
11 TDOC 16,242.56 94% 9% 0.95 -3.42 2.42% 5% -7% 6% 157%
12 EXAS 19,041.27 80% 9% 0.03 0.89 0.29% 0% 14% 46% 55%
13 ADPT 5,345.19 43% 9% 2.07 0.82 3.27% 11% 1% 36% 93%
14 VCRA 993.64 82% 8% 1.76 -1.38 2.27% 4% 8% 4% 58%
15 CNMD 3,036.00 93% 8% 0.93 -0.31 2.45% 3% -4% -6% -27%
16 ALXN 25,810.28 -63% 7% 1.39 -1.26 0.45% 9% 2% 23% 15%
17 OMCL 3,669.40 89% 7% 1.18 3.04 1.22% 6% 15% 33% 23%
18 TMO 202,298.88 94% 7% 1.30 -2.42 0.27% 12% 16% 29% 80%
19 MEDP 4,095.97 91% 7% 0.12 -1.00 0.71% 7% -1% -3% 68%
20 GNMK 814.00 30% 7% 0.99 -3.29 1.89% 13% -3% -11% 147%

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 11
 Negative Revision Trends
Top 20 negative revenue revision trends
• The Microquads start with
revision trends in the short
Sales Microquad term.
Sales
Rank Ticker Market-Cap Estimate Growth Acceleration Expected 1W-Return 1M-Return 3M-Return 1Y-Return
Correlation
Change Return • For example - HRC
estimates have been
1 BIIB 43,865.70 24% -14% -1.92 2.41 3.11% 31% 15% 10% 15% falling in recent weeks. On
2 MDRX 2,594.49 13% -5% -0.11 0.23 0.82% 11% 31% 25% 0% balance, the environment
3 GILD 46,929.25 69% -4% 0.26 -2.23 1.38% 2% -7% -14% -8%
for Health Care Capital
4 MD 2,658.84 22% -4% -0.10 3.62 0.81% 29% -1% -22% -36%
spending should be
5 TTOO 172.33 -25% -4% 1.31 -1.88 0.15% -8% -10% -41% -53%
anticipated to be weak.
6 EVH 1,076.56 -44% -3% -0.98 1.03 1.59% 18% 3% -11% 26%
7 ITGR 2,719.77 -69% -3% 0.36 0.49 1.28% -2% -10% -12% -23% • BIIB ex the Alzheimer’s FDA
8 HRC 7,899.16 95% -2% -1.20 2.57 1.83% 2% 4% -3% -10% meeting setback looks like
9 SPNE 263.45 36% -2% 1.35 0.20 0.35% 7% -13% -2% 2% a short.
10 RCM 3,744.01 95% -2% -0.08 0.42 0.66% 6% 8% 22% 61%
11 BDX 82,085.26 89% -1% -0.13 -0.68 0.71% 2% 0% -8% -3%
12 TCMD 686.32 66% -1% -0.21 3.01 0.82% -3% -10% -7% -32%
13 HCSG 1,518.58 31% -1% 0.03 1.28 0.68% -1% -6% -18% -10%
14 HSTM 464.24 28% -1% 0.29 1.20 1.30% 0% -14% -21% -33%
15 HQY 4,556.44 36% -1% -0.46 0.56 1.84% 3% -3% -2% -14%
16 IART 4,971.38 80% -1% 0.25 0.70 1.31% 11% -3% -1% -16%
17 CHE 7,851.32 97% -1% -1.12 -0.34 1.82% 3% 3% -2% 22%
18 ONEM 3,290.84 34% -1% 0.41 -1.69 1.13% 12% 5% 7% 0%
19 PRGO 8,856.23 81% -1% -0.30 0.46 0.97% 2% -2% -14% -18%
20 NEO 4,269.14 94% -1% -0.09 -0.94 0.56% 4% 4% 3% 85%

Data Source: Hedgeye, FactSet, Data Science © Hedgeye Risk Management LLC. 12
 HRC | Negative Revision Trend Continues
Economic headwinds and structural changes from Telemedicine adoption will continue to pressure Hospital/Medical Capex

Data Source: Hedgeye Estimates, NIH © Hedgeye Risk Management LLC. 13

 TDOC 3Q20 | COVID-19 Re-Accelerating
Weekly Users remains strong for Betterhelp

Data Source: Hedgeye Estimates, Sensor Tower © Hedgeye Risk Management LLC. 14
 MASI 3Q20 | COVID-19, Capex, Commodity
App downloads sequentially flat, positive year over year, COVID is a tailwind vs Hospital Capex, etc.

Data Source: Hedgeye Estimates, Sentieo, Sensor Tower © Hedgeye Risk Management LLC. 15
 ILMN 3Q20 | NIH tailwind
Capital raising in ‘Genomics’ and strong NIH grant trend, Grail/Galleri questions building

$6,000,000,000 60%

50%
$5,000,000,000
40%

Total NIH Grant Cost - YoY%

Total NIH Grant Cost - TTM
$4,000,000,000 30%

20%
$3,000,000,000
10%

$2,000,000,000 0%

-10%
$1,000,000,000
-20%

$0 -30%

Jan-10

Jan-11

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Jul-19
Jul-10

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Jul-18

Jan-20
Jul-20
Total Cost TTM Total Cost TTM - YoY %

Data Source: Hedgeye Estimates, NIH © Hedgeye Risk Management LLC. 16

 HOLX | Past the initial revision peak?
Beneficiary of COVID-19 testing leading platform, with capex and utilization headwinds

Data Source: Hedgeye Estimates, NIH © Hedgeye Risk Management LLC. 17

 TXG | Adoption Has a Long Way to Go
NIH funding for TXG’s equipment and consumables touches 2000 of the 300,000 funded scientists
Funded PI - Count
2500

2000

1500

1000

500

Data Source: Hedgeye Estimates, NIH © Hedgeye Risk Management LLC. 18

 ADP Employment Report October 2020
19,815 Healthcare Employees +68,000 October versus 101,000 September

Forecast turns Positive February 2021 Percent of Private Payrolls, recovery slowing

Data Source: ADP, Hedgeye Estimates © Hedgeye Risk Management LLC. 19

 Healthcare Employment
Recovery slowing, elevated wage inflation
6.0 4.0
12-Month Percent Change

12-Month Percent Change

4.0
2.0
2.0
0.0 0.0
-2.0 -2.0
-4.0
-4.0
-6.0
-8.0 -6.0
-10.0 Healthcare - Index of Aggregate Weekly Hours All Employees -8.0 Healthcare - All Employees
-12.0
-10.0
Jan-15

Jan-16

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Jan-19
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Oct-19

Jul-20
17,000 5.0
Number in Thousands

12-Month Percent
16,500 4.0
16,000

Change
3.0
15,500
2.0
15,000
1.0
14,500 Healthcare - All Employees Healthcare - Average Hourly Earnings Production and Nonsupervisory
14,000 0.0

Jan-15

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Jul-20
Healthcare employment and demand for labor bottomed in April 2020 at -9.5%. The recovery is stalling at -2% year over year
decline in the aggregate, although subindustries such as Nursing Homes are faring far worse than other subgroups such as
Dentists and Chiropractors. Wage inflation has been substantial for a host of reasons.

Data Source: BLS, Hedgeye Estimates © Hedgeye Risk Management LLC. 20

 Office of Chiropractors Employment
Massive uptick in Aggregate Weekly Hours and Average Hourly Earnings
10.0 15%
12-Month Percent Change

5.0

12-Month Percent Change

10%
0.0 5%
-5.0 0%
-10.0 -5%
-10%
-15.0
-15%
-20.0 -20%
-25.0 -25%
-30.0

Jul-15

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Oct-20
Offices of Chiropracters - Production and Nonsupervisory Employees Office of Chiropracters - Aggregate Weekly Hours
12.0

12-Month Percent Change

10.0
10.0
8.0
12-Month Percent Change

5.0
6.0
0.0
4.0
-5.0 2.0
-10.0 0.0
-15.0 -2.0
-20.0 -4.0
-25.0 -6.0
Jul-15

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Offices of Chiropracters - Women Employees Offices of Chiropracters - Average Hourly Earnings Production and Nonsupervisory

In person care has done better where patient population is younger, and on average, less at risk from COVID-19. Nursing Care,
Assisted Living, and Retirement Communities continue to experience sequential decline in demand for utilization and labor.

Data Source: BLS, Hedgeye Estimates © Hedgeye Risk Management LLC. 21

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© Hedgeye Risk Management LLC. 22