Healthcare Investor: 11/2/18
a) 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. As usual, we will follow-up with texts that include healthcare stock ideas
b) Cool Charts:
Chart 1: Primary Care Doctors:43.5% of Primary Care Docs work for a hospital/healthcare system, up from 27.7% in 2010.This results in higher costs as hospital outpatient charges are often much higher than similar services at an independent practice or medical group, which have both given up substantial share.
Chart 2: Hospital expenses are at about 37-39% of personal healthcare expenses, down somewhat from 41% in the early 1990's. Prescription drugs have risen to 12-13% of healthcare expenditures from about 5% in the mid-1990's.
c) Summary of Ideas and Updates:
· Ratings Updates:
· ABT: Raised to Green from Gray on recent sell-off.
Healthcare Colors reflect our views on current prices in the context of our longer-term investment rating.
Blue = Stock is compelling. Recommend buying or increasing position size materially at current prices.
Green = Stock is relatively attractive. Recommend adding to existing position at current prices.
Gray = Stock reflects balanced risk-reward at current prices or no sentiment opinion. No action rec'd.
Yellow = Stock is relatively less attractive. Recommend reducing existing position at current prices.
Red = Stock is not attractive. Recommend exiting existing position at current prices.
· Best Ideas:
· Healthcare Services & Providers: ABC (Blue), CVS (Blue)
· Medical Devices: ABT (Green), ZBH (Blue)
· Large Cap Pharma/Biotech/Consumer HC: AGN (Blue), ALXN (Blue), BMY (Green), CELG (Green), GSK (Blue), PFE (Gray), PBH (Green)
· Idea Updates:
· CVS: Stock -9% after announcing that AET CFO Shawn M. Guertin has decided to step away for personal and family reasons. Eva Boratto, currently Controller and Chief Accounting Officer, will become EVP and CFO of CVS Health. While disappointing, it is not thesis changing and all 3 key AET execs that run the 3 segments are staying. Shawn came from the AET side and would have been a great CFO. I do not know Eva but will look to get insights on whether she is permanent or temporary. I and others wanted a Managed Care exec as CFO. Earnings on 11/6
· ZBH: Featured its ROSA spine robot at NASS (Doc Spine Conf). The ROSA system will offer robotics and navigation in a single system. ZBH is targeting a soft launch of the ROSA spine capability shortly after the release of the ROSA knee application which is anticipated by the end of this year – a full launch is expected towards the middle of 2019. My Take: This is another pipeline product that is tracking the new CEO’s expectations. It is a competitive response to SYK’s MAKO platform and is one of a few key products that close the gap to SYK. Next Up: Earnings on 10/26
d) Material Updates to Ideas & Industry:
· Walgreens (WBA): A number of interesting data-points from Walgreens over the past 2 weeks:
o F4Q18: Stock has been strong after a mediocre F4Q but F19 guidance bracketed consensus. US Retail SSS (same-store sales) growth increased +0.3% y/y; SS Rx +1.3% y/y; SS Front-end: -1.9%. GMs were weaker than expected driven by the acquisition of the lower margin Rite-Aid stores and mix shift to specialty offset by lower SG&A. FY19 EPS guidance implies +7-11% growth from +4-5% EBIT growth and the rest from buybacks.
o CEO said: 1. regarding an ABC acq:“It is something that could happen at a certain point, maybe yes, maybe no,” 2. “We should have bought an insurance company four years ago when our multiple was higher than their multiple." and 3. "The customer of the future will not be happy to sit at home to talk to an Alexa.”
o Collaboration with McLaren Health Care: WBA will enter a partnership with McLaren Health Care, a regional integrated health system. McLaren will provide health service offerings at WBA retail locations throughout Michigan, including retail clinics, urgent care centers, and primary care sites (sounds like CVS strategy but no benefit design control?). WBA will operate 3 McLaren’s pharmacies (two health facility pharmacies; one retail pharmacy).
· United Health (UNH): Reported a good 3Q BUT we continue to see negative reserve development which could imply pricing or cost issues. Bought pharmacy company Genoa Healthcare (425 pharmacies) from private equity for about $2.5 billion, which included a team of more than 250 psychiatrists & nurse practitioners who provide telepsychiatry services. UNH beat out Walgreens. $2B in revenue in 2018E.
· Novartis' generic segment Sandoz: US generic pressures continues with US -17% y/y (-18% in 1Q18 and -16% in 2Q18). However, Sandoz margin looked stable implying profitability in this segment is finally stabilizing. Global generic price erosion appears stable at -8% vs -9% in 2Q18, -6% in 1Q18, -8% in 4Q17, -8% in 3Q17. Generic industry issues are stabilizing…which could be positive for drug distributors like ABC.
e) Recent Pipeline Readouts & Updates:
· Alexion (ALXN): On 9/24, ALXN reported strong phase III results for their core drug Soliris in neuromyelitis optica (NMO). Soliris reduced the risk of relapse by 94% compared to placebo. With no treatments labeled for NMO, the trial results support label expansions for Soliris worldwide. NMO could be a +$1B incremental opportunity
· Migraine Market: Migraine is a potential $5B oppty as new products are launching. Express Scripts has decided to provide coverage for recently-approved migraine drugs manufactured by LLY's Emgality and AMGN's Aimovig but NOT Teva's Ajovy. ESRX said that the three drugs were "fairly interchangeable" and that the decision was based on which manufacturers offered the best value and discounts.
· Allergan (AGN): Announced the completion of two positive safety and tolerability studies of ubrogepant for the acute treatment of migraine. It appears the results of both studies at various dosages were safe enough for AGN to submit a New Drug Application (NDA) to the FDA in 1Q19. Ubrogepant may be the first oral CGRP submitted in US for acute migraine. We think AGN could be building a migraine powerhouse with orals and Botox.
· MRK/PFE – combo of Keytruda + Inlyta shows PFS and OS in renal cell carcinoma.
· Biogen (BIIB): launches its biosimilar version of ABBV’s Humira in EU along with 3-4 other players.
· Novartis (NVS): Novartis could release two new gene therapies to the market within the next 12 months.
f). Upcoming Events/Catalysts:
· Oct-Nov: 3Q18 Earnings
· 10/19-26: ESMO (European Cancer Conf)
· 10/24-27: BIIB/Eisai present detailed Alzheimer's data from BAN2401 Phase 2 study
· 11/6: Mid-Term Elections (divided Congress is best)
· 11/14: PBH presents at MS Consumer Conf
· 11/27-29: Evercore ISI HC Conf in Boston
· 11/27: UNH Analyst Day in NYC
· 3Q18/4Q18: CVS-AET merger expected to close
g) Key Device & Bio-Pharm Trial Events:
· Amgen (AMGN): Potential biosimilar launches on Neulasta (AMGN product)
· AstraZeneca (AZN): 2H18: Cardiovascular outcome trial for SGLT2 Forxiga DECLARE study; 2H18: Imfinzi/Treme in 1L lung cancer (NEPTUNE)
· Bristol-Myers Squibb(BMY): 2H18: Phase 3 data in the following cancers: HCC, GBM, MM, NSCLC
· Celgene (CELG): 2H18: JCAR017 (CAR-T cancer therapy) additional pivotal data updates
· Lilly (LLY): 2H18: Trulicity REWIND study (for Cardiovascular benefit); 2H18: NVO P3 oral semeglutide data; P3 Cyramza data (RELAY) for 1L lung cancer
· Merck (MRK): 10/30: MRK PDUFA U.S. approval for Keytruda+ chemo in 1L metastatic squamous cell lung carcinoma; 2H18: Lynparza P3 data in pancreatic cancer
· Pfizer (PFE): 2H18: tanezumab P3 Pain data
· Roche: 2H18: P3 data in RCC IO/Avastin combo for all comers and PDL1>50%; P3 data in Colorectal from COTEZO trial; P3 data in Melanoma from TRILOGY trial; Tecentriq + chemo +/- steroids data in NSCLC (5 studies), RCC, SCLC, and TNBC (in 2018)