Healthcare Investor: 12/18/18
a) Key Areas of Focus in Healthcare:
· 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. Defendants likely to seek a stay pending appeal and HHS has confirmed status quo and no change to the ACA. Some stocks were -15% but many were -3-5%. 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.
· 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.
· The three trillion dollar hedge fund market is shrinking: Fund closures have outnumbered launches for the third year. I am hearing of a number of healthcare fund teams getting liquidated…with liquidations creating dislocating stock opportunities.
b) Cool Charts:
· Chart 1:Worldwide population over 65 was 533M or 7.8% of total population in 2010. This will grow to 729M or 9.6% by 2020. This is expected to continue growing to 12% of the global population in 2030 and 16.6% in 2050.
· Chart 2: Average Annual Medical expenditures by age are listed below for people 65 and over. At age 70, average expenditures are about $12,000-13,000 per year with inpatient, outpatient, and doctors costs as the key drivers. By age 80, average expenditures are about $15,000-16,000 per year, with nursing costs growing dramatically. By ages 90-100, nursing costs are the largest driver of medical expenditures.
c) Summary of Ideas and Updates:
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: ZBH (Blue), ABT (Green),
· Large Cap Pharma/Biotech/Consumer HC: ALXN (Blue), BMY (Blue), GSK (Blue)
o Short AMGN (Red)
· Under Consideration: NVS, AGN, GSK, AZN
· Core Idea Review of the Month: AmerisourceBergan (ABC): We believe that ABC's revenues are accelerating and margins likely rebound back to historical levels driving a re-valuation from trough to normalized valuation levels. ABC is bringing on drug volumes and revenues of as much as $14-15B from the WBA partnership with Prime Therapeutics (4th largest PBM) and the WBA-RAD deal. Margins are at trough levels from investments in DCs (distribution centers) to manage the new business. We expect margins to begin to normalize as the new business rolls on in 2H18-2019 and the PharMEDium segment (compound pharmacy) re-opens after FDA standard changes caused a temporary closure in the main facility.
· Key Metrics to Monitor Each Quarter:
· Revenue Growth in-line or better than cons
· Margin expansion towards normalized levels after revenue growth acceleration.
· EPS growth in-line or better than cons (our est's for earnings power are materially above cons)
Strategic Metrics to monitor:
· Stable Generic deflation commentary: currently in HSD range
· Stable Branded price inflation commentary: +6-8%
· PharMEDium re-opens, volumes ramp, FDA issues resolved
· Best Idea Updates:
· CVS: Merger is now closed despite some headlines from a district court judge that has a political agenda. The worst case is court monitoring but the integration is ongoing. With Maintenance Choice, they proved that by integrating assets and focusing on profitability at the enterprise level, CVS can offer a differentiated offering. They now hope to do this in Managed Care. 15-20% of front of store could be re-purposed but not planning on higher capex…instead are re-purposing capex dollars at retail level. My Thoughts: I would add in the $70 range. The next event is 4Q18 results and 2019 guidance. I think stock will be range-bound until then. With the merger close, our thesis is progressing.
· ABC: Met with ABC CFO and Head of PharMEDium at the ISI conference. Stock is likely rangebound until PharMEDium comes back on-line. Unclear on timing but I think it happens over the next 6-12 months.
· ALXN: At ASH, there were a number of updates on competitor drugs to ALXN's C5 franchise, but ALXN's next gen 1210 should protect this franchise as it is better on duration and efficacy. Competition on ALXN’s franchise is the key overhang for the stock. Competition remains years away and remain at best on par with Soliris but materially behind next-gen ALXN1210/Ultimoris. ASH had data on 3 competitors Ra Pharma, Roche’s SKY59, and Regeneron’s REGN3918. Ra Pharma showed that their daily subcutaneous C5 inhibitor zilucoplan is effective in treating myasthenia gravis (MG), but a materially inferior drug profile (daily injection) to ALXN's franchise (IV every 8 weeks). Roche/Chugai's SKY59 had reasonable levels of LDH reduction in treatment naïve patients but was inferior to next-gen ALXN1210 in dosing, duration, and efficacy. REGN3918 Showed safety data from a P1 study and they are moving to P2 with a once weekly subcu and IV dosing vs. ALXN1210 at once every 8 weeks. All are behind ALXN's franchise in duration and are years behind.
· BMY: On 11/27, we met with the head of US Commercial Business. 2L NSCLC: sounds like they are still seeing good uptake in this and could see better growth OUS and stability in US. Beyond 2019, lung will depend on how much 2L shrinks and future trials. Docs do not see differences in PDL1s but they will prescribe to the labels. Investors are missing their recent pivots: Their initial belief was IO-IO would replace chemo. But, recent science showed IO with existing treatments offer a new pathway. They see IO-IO and IO-non-IO combos (like chemo) in the future. The future will be combos…just not IO-IO only but also IO-Non-IO. Initially, they wanted to replace chemo. Now they are focusing on combos with existing therapies. This led to adapting the different trial like 9LA, 227, and a future renal study. In 2019: HCC, GBM, NSCLC, and Gastric will have P3 trial data. Beyond 2019, Adjuvant and Refractory resistant IO patients may provide additional growth.
d) Material Industry Updates:
· ASH Medical Conference (Hematology): A key debate exiting ASH is on the emergence of bispecifics (REGN, AMGN, Roche) as threat to CAR-Ts (CELG, GILD, Novartis). Bispecific data looks promising but still very early in small patient trials. There will likely be co-existence of both modalities, though there seems limited consensus among investors on how to solve for this at a single stock level in a therapeutic area (blood cancers) that is getting increasingly crowded. AMG 420 (BCMA-targeted BiTE) appeared to be well received by physicians (particularly as an off-the-shelf alternative to CAR T) but in very small patient numbers.
· JNJ (-10%): Reuters reported company knew about asbestos in baby powder talc supply for decades and noted efforts to influence U.S. regulators' plans to limit asbestos in cosmetic talc products. Article also points to internal testing in the 1970’s that point to asbestos in talc. JNJ is appealing all verdicts and maintains talc is safe. JNJ saying that research shows talc-based body powder do not cause cancer. And, they dismiss the Reuters cited tests that show asbestos as outliers when compared with the thousands of other tests that indicate JNJ talc is asbestos free. Talc products contributed $420 million to J&J’s $76.5 billion in revenue. I'm mixed on JNJ for other reasons including a material exposure to biosimilars and patent expirations over the next few years.
· Amazon in Healthcare: WSJ reports Amazon is going to introduce software that would mine patient health records to improve care, cut costs and sell medical supplies. It is unclear if this software/service would replace an EHR and disrupt current HCIT players (CERN, MDRX, ATHN, UNH) or just analyze the data stored in current health record systems. HIPAA issues may be emerging.
· Part D Proposal: CMS is trying to lower out of pocket costs for the so called “protected” classes such as antipsychotics, antidepressants, anti-convulsants, certain immunosuppressants and antineoplastics. CMS is allowing “step therapy” in Medicare Advantage for Part B drugs, thereby encouraging access to high-value products such as biosimilars. In Part D, CMS is proposing is to allow plans to use step therapy, prior authorization and a more robust tiering than is currently allowed.
· GSK: Announced acquisition of TSRO but GSK stock was down 7% following the news, shedding more market cap than the $5bn value of the deal.
· Takeda: wins shareholder approval for £46bn Shire acquisition
e) Recent Pipeline Readouts & Updates:
· BMY: Trial of Opdivo-Yervoy failed in maintenance SCLC (small cell lung cancer, 40k diagnosed), a more limited opportunity than NSCNC (non-small cell lung cancer, 240k diagnosed). Opdivo is approved in 3L SCLC. It recently failed in 2L mono and now the combo has failed in 1L maintenance setting. As background, there are no great therapies for SCLC and chemo remains standard of care. From a clinical perspective, other SCLC trials use IO agents paired with chemo but BMY ran a trial with IO alone vs. chemo alone as they were ahead of others. Other trials could show interesting results as the science has now pivoted to initial dosing of chemo followed by IO therapy to “heat” or “flare” the tumor before using the IO agent. BMY pivoted to IO-Chemo and IO-IO-Chemo in upcoming trials over the next 12-18 months..but intentionally left SCLC to competitors.
f). Upcoming Events/Catalysts:
· 1/3: GS HC CEO Conf
· 1/7-1/10: JP Morgan HC Conf
· January 2019: 4th Quarter Pre-Announcements & 2019 Company Guidance updates
g) Key Device & Bio-Pharm Trial Events:
· Amgen (AMGN): 4Q18-1Q19: Potential Sensipar generics launch and Enbrel court decision due on generic entry and potential at-risk launch
· Alexion (ALXN): Feb '19: FDA approval of ALXN1210/Ultomiris in PNH; 1Q19 FDA filing for Soliris in NMO; 1Q19 ALXN1210 data in aHUS
· Biogen (BIIB): 2019: Potential interim read on Alzheimer's drug Aducanumab
· Bristol-Myers Squibb(BMY): 2H18-1H19: Phase 3 data in the following cancers: HCC, GBM, MM, NSCLC, and head & neck. NSCLC will have variable arms reading out, some with Chemo and some without.
· Celgene (CELG): 2H19: Ozanimod Phase 3 Ulcerative Colitis (TRUE NORTH); 2H19: Fedratinib in myelofibrosis PDUFA; 2019: bb2121 in MM data; 2019: JCAR017 in DLBCL US approval
· GlasoSmithKline (GSK): Anytime: Generic Advair approval.
· Merck (MRK): -12/28/18: PDUFA US approval for Keytruda in 2L SCCHN (KN-040)
· Shire: 1H19: Merger close with Takeda; 4Q18: SHP621 P3 data expected for Eosinophilic Esophagitis (EoE), potential $1B market oppty; 12/21: PDUFA on SHP 555 Prucalopride for Chronic Idiopathic Constipation (CIC)