·         Elevated volatility continues across the markets…So far, there have been 18 days (including today) with 2% or more sell-offs versus ZERO in 2017. 

·         On 12/14, a Texas judge ruled in favor of a lawsuit against the Affordable Care Act (ACA) calling the individual mandate unconstitutional without a tax penalty & ruling the entire ACA is inseverable & unconstitutional.  There is no immediate impact as it is a declaratory judgment, not an injunction.   This will take a while to work through the court and political system but precedent implies the law will be preserved either through the appeals process or a Democratic House. 

·         The three trillion dollar hedge fund market is shrinking: Fund closures have outnumbered launches for the third year.  Liquidations are creating dislocating stock opportunities. 

Key Areas of Focus in Healthcare: October was an extremely volatile month.  The stock market was down 6.0% after going up 7% in the 3rd quarter.  Healthcare stocks rallied 14% in 3Q18 and were down 5.6% in October.  As we work our way through 3Q18 earnings, key themes are FX, especially Emerging Market exposures, China tariffs (mostly life science tools impacts), drug pricing for 2019, and overall healthcare utilization.  3Q18 is a tough quarter to forecast given hurricanes and seasonality of deductibles that pushes sales to 4Q a bit more every year.  Despite elevated stock volatility, earnings key metrics have been largely in-line with expectations.  We view the current setup as a long term buying opportunity and continue to see innovation, the aging of the population in developed markets, and expansion into emerging markets as key drivers for continued growth in healthcare spending. 

Highlights: 

• Healthcare stocksare +14% YTD vs. +10% S&P.  After 2+ years of underperformance, Pharma rallied +18% so far in 3Q (vs. S&P +8%).  Life Science Tools are +19% (continued momentum) and Services are +13% (improved sentiment on mergers).  

• Medtronic (MDT): Just met with senior management. Many interesting changes going on.  

• M&A for US Generics Sees New Low as NVS/Sandoz sells US generics business for ~4x LTM EBITDA.  

• Migraine:New class of drugs called CGRP are gaining FDA approval.  TEVA’s Ajovy (fremanezumab) approved 9/14/18. This is second CGRP to market behind AMGN's Aimovig. 

• Immuno-oncology:KOL(Key opinion Leader) Docs noted adjuvant use of PD-1/PD-L1 could transform cancer ultimately achieving 3x the metastatic revenue opportunity (metastatic sized at $44B in 2024). 

The Healthcare Investor: 

We are re-starting our weekly as we wrap up 2Q18 earnings and changing the name from Bi-Weekly to The Healthcare Investor.  Healthcare stocks underperformed the S&P500 by 20bps in 2Q18 and 40bps in 1Q18 but then materially rallied in July-August.  Healthcare stocks are now +9% YTD (year-to-date) vs. +5% S&P500.  Bio-Pharma and Life Science Tools stocks drove the sector with many up +10% in the past 6 weeks.  Pressures in the Tech industry coupled with continued strong earnings and positive pipeline developments likely drove stock performance. 

Highlights:

·         We recently met with the following CEOs/CFOs: HCA, ALXN, ZBH, VRX (see below)

·         Merger discounts have closed substantially since the AT&T-Time Warner ruling came out...and have held despite the gov't recent appeal. 

Judge rules against US DOJ and approves merger between AT&T-Time Warner.  Positive implications for pending mergers CVS-AET and CI-ESRX. Trade Wars with China…Medical devices have most exposure with about 5% of sales from China. 

AGN: 3 Positive Pipeline developments in last 2 months. Two in migraine and one in Glaucoma.  Activists gaining interest...stock +15% in 3 weeks.

BMY: Files with FDA for Opdivo plus low-dose Yervoy for treatment of 1L non-small cell lung cancer (NSCLC). This was unexpected...If approved, it would be the first non-chemo therapy for patients with NSCLC. Stock is +10% over past 3 weeks.

Drug pricing was met with investor skepticism around whether President’s Trump’s recent remarks of “voluntary, massive” cuts in two weeks will result in meaningful changes.  But, the “event” is now on radars for the next few weeks.  Investors are watching the 6/12/18 DOJ court decision on the AT&T-Time Warner merger as a barometer for the government’s ability to challenge vertical integrations, including the CVS-AET and CI-ESRX mergers…

We are re-starting our weekly as we wrap up 1Q18 earnings.  We have a number of updates since our last weekly (about 4 weeks ago) that we will summarize in the near future as we continue to catch up.  Healthcare stocks underperformed the S&P500 …

a) Key Areas of Investor Focus in Healthcare

·         Bio-pharma sentiment remains acutely out of favor with stocks not going up on positive pipeline news.  Pipeline catalysts may still re-ignite the group but the recent setbacks by ABBV and CELG are not helping investor confidence on pipelines…

a) Key Areas of Investor Focus in Healthcare

·         General Thoughts: Material sell-off in the markets over the past 2 weeks and healthcare underperformed.  Bio-pharma sentiment remains out of favor...even after the latest macro sell-off from concerns of trade wars.  Policy issues surfaced again this week in 2 ways. …