President Trump signed an executive order Wednesday that will encourage an increase in kidney transplants. This is a move to address a critical issue in the 2020 election cycle: astronomical healthcare costs.
Kidney disease currently costs the U.S. government about $110 billion per year through Medicaid and Medicare. The major problem is that a large portion of patients with kidney disease chose to undergo dialysis at costly treatment centers, instead of opting for at-home care or, ideally, a transplant.
The goal of this order is a 25% reduction in end-stage kidney disease by 2030. It directs the Department of Health and Human Services to develop policies to reduce the number of Americans developing kidney failure, reduce the number of patients requiring dialysis, and increase the number of kidneys available for transplant.
Trump’s new executive order creates new payment models that make transplants more attractive and pushes for further development of artificial kidneys. Analysts project that this order will fuel 12-15% annual growth in the number of completed kidney transplants.
Which Companies will Benefit?
CareDx CDNA sells a post-transplant diagnostic service for heart and kidney transplants. This diagnostic tool measures the level of cell-free DNA (DNA fragments from dead cells) in the bloodstream to predict whether the organ is being actively rejected. Therefore, doctors can decide on an appropriate course of treatment to maximize the chances of a successful transplant. CareDx’s tool is better than traditional methods as it is non-invasive and more accurate. It is also FDA cleared and covered by Medicare.
The new executive order benefits CareDx by increasing its products addressable market. If more people are getting kidney transplants, more people will need post-transplant care. The total market for heart and kidney transplant care is currently $2.6 billion annually, with CareDx already a major player. CDNA has already captured 30% of the market for post heart transplant diagnostics and 5% of the market for post kidney transplant diagnostics. And the firm’s kidney testing technology is still fairly new, so its market share is expected to grow quickly.
CareDx has already performed well in 2019, with growth of 62.8% YTD, much higher than the broader medical care market. Our Zacks Consensus Estimates call for current year earnings growth of 160%, with 2020’s earnings projected to jump 577% above our 2019 estimate.
CDNA is currently a Zack Rank #3 (Hold). But this ranking may change if and when analysts update their estimates following Trump’s new kidney-focused executive order. CDNA has also met or beaten our consensus earnings estimate in all of the past five quarters.
CDNA’s stock price jumped 2.20% to $39.43 Wednesday, in reaction to the executive order. The stock is now up 11.5% over the last five days.
On the other side of this executive order are the companies that provide dialysis to patients who have kidney disease and do not undergo a transplant. If transplant rates increase, dialysis providers will lose patients and therefore revenue.
Shares of two large dialysis providers, DaVita Inc. DVA and Fresenius Medical Care FMS, dropped earlier this week on news of this executive order. DaVita has fallen 6.3% over the past five days, with Fresenius falling 3.9%.
Both DVA and FMS hold a Zacks Rank #4 (Sell) with sales projected to shrink this quarter. These stocks may continue to drop if this executive order turns out to be effective in encouraging higher volumes of kidney transplants.
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