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 by 40bps in 1Q18 with bio-pharma and healthcare services underperforming by more than 200bps offset by continued outperformance in medical devices and life science tools companies.
a) Key Areas of Investor Focus in Healthcare: We continue to see near term volatility from M&A regulatory outcomes, pipeline risks and opportunities, and headline risks around drug pricing from the Trump administration. However, we view the current setup as a long term buying opportunity. We see innovation, the aging of the population in developed markets, and expansion into emerging markets as key drivers to our thesis for continued growth in healthcare spending. This is offset by the financial limitations of government payors, employer sponsored payors, and consumers through greater cost sharing. We highlight some of the key areas of focus for investors below:
- Merger Discounts to Take-Out Price:
- AET: +13% spread to CVS take-out
- ESRX: +24% spread to CVS take-out
- SHPG: +16% spread to Takeda take-out
- M&A: Merger & acquisition activity has picked up and could continue as large healthcare companies repatriate overseas cash into the US. We are seeing above average spreads to take-out given elevated uncertainty around the regulatory environment. The AT&T-Time Warner merger case against the US Gov't will have broad implications for these and other deals with a judge's ruling expected in May-June. News recently broke that Wal-Mart (WMT) and health insurer HUM were in early stage discussions on everything from a deeper partnership to an outright merger. Novartis (NVS) also announced the acquisition of gene therapy company AveXis for $9B (all cash). In May, Takeda made an offer to acquire Shire (SHPG). In March, Cigna (CI) announced the acquisition of Express Scripts (ESRX) that is expected to close by the end of 2018. In December, CVS announced the merger with Aetna (AET) to form one of the largest healthcare services companies.
- Medical Device stocks continue to outperform as revenue growth has been consistent and pipelines are translating into incremental revenue growth. Our top ideas are Abbott (ABT) and Zimmer-Biomet (ZBH).
- Bio-pharma sentiment remains acutely out of favor with stocks not holding strength on positive pipeline news and good quarters. Recent volatility is a reminder of the ups and downs of drug development. Bio-pharma pipeline setbacks at Celgene (CELG) and Abbvie (ABBV) have driven concerns that have pressured healthcare stocks. Despite these setbacks, bio-pharma pipelines are very robust with multi-billion dollar opportunities translating into revenue from disease categories like migraine, non-opioid pain medications, and oncology in the near future. We believe the recent pressures in bio-pharma create a compelling buying opportunity as we see strong pipelines and many late stage trial results as catalysts over the next 12-14 months. Also, overhangs persist around bio-pharma pricing actions by the Trump administration (see below). Pipeline catalysts may still re-ignite the group but the recent setbacks by ABBV and CELG are not helping investor confidence. Even during market swings, bio-pharma is not showing defensive support.
- Healthcare services sentiment turned negative in 2018. Many stocks are in deal purgatory and have low visibility into either the timing or potential to close mergers given regulatory pushback on vertical mergers. More specifically, investors look to gain better visibility into a number of large cap mergers (CVS-AET, CI-ESRX).
- Amazon (AMZN) entry into healthcare: In mid-April, news reports surfaced that Amazon has halted its plan to sell drugs to hospitals through Amazon Business, its marketplace for business customers. Competition from AMZN had materially weighed on healthcare stocks in the pharma supply chain. According to reports, AMZN noted the biggest challenges include complexities around selling in bulk to large hospitals and building a logistics network to handle bio-pharma delivery of temperature controlled drugs. This is consistent with our opinion given AMZN's lack of scale and knowledge in healthcare.
b) Rating Updates
- Long-Term Ratings Changes: None
- Healthcare Sentiment Changes: None
Healthcare Sentiment 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.
c) Best Ideas (at current price points): *High Conviction Risk-Reward
- Healthcare Services & Providers: *ABC, *AET, *CVS, *ESRX, *MCK,
- Medical Devices: ABT, *ZBH
- Large Cap Pharma/Biotech: *AGN, *ALXN, *BMY, *BIIB, *CELG, *GSK, *PFE, *SHPG
d) Material Updates to Ideas & Industry:
- Trump Rolls Out Healthcare Initiatives on Drugs: On May 11, President Trump gave a highly-anticipated speech, during which he outlined the administration’s “comprehensive” plan to lower the cost of prescription drug prices for patients. The “American Patients First” blueprint appears to be more bark than bite as a majority of the immediate action items are unlikely to materially impact the industry. Despite President Trump’s rhetoric of 'going after the middlemen,' the overall blueprint does not replace the rebate system or overall need of PBM services. Outcomes-based pricing models still need to develop in the market. Medicare will ultimately follow the commercial markets but this will take years. The White House is looking to shift Part B drugs to Part D. While pricing should be similar, rebating and formulary management could pressure bio-pharma economics that could translate to higher earnings by PBMs for management of these services. Ultimately, we see major changes to require an act of Congress where there is little appetite to take on healthcare.
- Earnings: Among healthcare bellwether companies, revenue growth in 2017 averaged +7.4% (median +7.7%). Going forward, healthcare revenue growth remains in the mid-single digit range on a global basis . We are not seeing signs that change this perspective. For 2018, consensus sees an average +5.1% revenue growth among bellwether healthcare companies, slightly up from expectations of +4.9% before earnings.
- BMY: Received FDA approval to launch their IO-IO combo in kidney/renal cancer. BMY now has their IO-IO combo approved in 2 cancers, Renal and Melanoma. BMY's IO-IO franchise has many upcoming trials in various cancers. We continue to believe BMY has the most exciting oncology pipeline driving the early stage of a potential long tailed product cycle.
- ABBV: In conjunction with 1Q18 earnings on 4/26/18, ABBV announced a modified $7.5B "Dutch auction" tender offer for shares of its common stock to commence May 1, 2018 at a price no less than $99 and no more than $114 per share. The tender will expire at the end of the day on May 29. ABBV will then determine the lowest price within the range above that allows the company to purchase up to $7.5B of its common stock, which amounts to. 4-5% of shares outstanding. Within the context of our 2/B rating, we recommend shareholders tender ABBV in the Dutch Auction between $99-114. We would use the proceeds to buy our 1-rated names in bio-pharma.
- NVS: Announced 2 major deals this quarter.1. AVXS: NVS announced the acq of Avexis (AVXS) for $218/share or $8.7B cash. This is a big bet on gene therapy for NVS. 2. NVS is selling its 36.5% Consumer Healthcare stake back to JV partner GSK for $13B (£9.2bn).
e) Recent Pipeline Readouts & Updates:
- Oncology Medical Conference: Lung cancer is the largest cancer market with over 200k people globally and a potential $40-60B market. Data from Merck’s NSCLC (non-small cell lung cancer) trial KN-189 (Keytruda/Chemo in 1L NSCLC) and Bristol’s trial CM-227 (Opdivo/Yervoy in 1L NSCLC) was released at a recent medical conference. MRK was +3% and BMY was -10%. Merck’s data focused on the PD-L1 biomarker and BMY’s data focused on the Tumor Mutation Burden (TMB) biomarker, which is a more recent development. We had many discussions with doctors and believe investors over-reacted to straightforward and clean data from MRK vs. still maturing data from BMY. In this context, BMY's data was strong but more debatable given the context relative to MRK. Many doctors believe BMY's data is approvable based on what we've seen so far. And, there is a sizeable niche of patients that do not want or cannot take chemo and would be candidates for BMY’s non-chemo combination. Ultimately, we believe sales will be driven by Overall Survival (OS) data that is still emerging. MRK's data strongly reinforced their leadership in key markets of lung cancer.
- Alexion (ALXN): ALXN announced positive Ph3 data in the ALXN1210 PNH Switch study. After two datasets on 1210 (Switch & Naïve) ALXN sees consistent efficacy in this next gen Soliris franchise which has longer dosing and is trending better on efficacy. ALXN reiterated their expectation for phase III data for ALXN1210 in the aHUS indication in 4Q18. ALXN also plans to initiate enrollment for a phase 3 study of ALXN1210 with weekly subcutaneous formulation in 4Q18. We believe the key 1210 franchise has been de-risked with 2 strong clinical trials.
f). Upcoming Events/Catalysts:
- 5/15-5/17: BofA Healthcare Conf (Vegas)
- 5/21: BAX Analyst Day (NYC)
- 6/1-6/5: American Society of Clinical Oncology (ASCO) in Chicago
- 6/5: MDT Analyst Day
- 6/5-6/8: Jefferies Healthcare Conf (NYC)
- 6/12-6/14: Goldman Sachs Healthcare Conf (L.A.)
- 6/18: MYL FDA Action Date on Neulasta Biosimilar
- May-June: AT&T-Time Warner court case ruling with potential read-throughs to CI-ESRX and AET-CVS
g) Key Device & Bio-Pharm Trial Events:
- Allergan(AGN): 1H18: 2nd Ubrogepant for Migraine Ph3 trial results (ACHIEVE II trial); Atogepant Ph2B results for chronic migraine
- Alexian(ALXN): 2Q18: Expects Soliris phase III NMO data in 2Q18
- BMY: 1H18: CM-331 P3 Opdivo data in 2L SCLC; July '18: US approval of Opdivo+Yervoy in 2L treatment of adults with microsatellite instability-high (MSI-H) or mismatch repair deficient (dMMR) metastatic colorectal cancer (mCRC) based on P2 data from CM-142 trial; Aug '18: U.S. approval for 3L+ in SCLC (PDUFA 8/16/18); 2H18: CM-459 P3 Opdivo data in 1L HCC; 2H18: CM-451 combo therapy data in 1L Maintenance of SCLC; 4Q18/1Q19: Opdivo + Yervoy CM-227 second co-primary endpoint (overall survival in the PDL1 expresser) group
- BIIB: 1H18: BIIB098: next gen Tec, P3 data in MS. Filing planned within the next year; 3Q18: Could see Aducanumab interim data (18 month data); 2H18: BAN-2401: 18 month analysis in late 2018 for Alzheimers; 2H18: BIIB074: P2B data in painful lumbosacral radiculopathy; Oct 2018: Launches IMRALDI (biosimilar Humira) in Europe
- Celgene(CELG): 1H18: Revlimid in Follicular lymphoma Ph3 RR iNHL and DLBCL (AUGMENT & ROBUST trials); Mid-18: P3 data from Luspatercept in MDS and beta-thalassemia (BELIEVE & MEDALIST trials)
- Eli Lilly(LLY): 1H18: Olumiant/baricitinib PDUFA mid-18; Ph II data in SLE (early ’18); 2H18: Verzenio/Abemaciclib EU, Japan approval in breast cancer; 2H18: Galcanezumab (CGRP) U.S. PDUFA for migraine prevention; Ph III data in cluster headaches (1H18); 2H18: Lasmiditan filings for migraine treatment; 2018: Cyramza filings in 2L bladder and 1L gastric cancers; Ph III (REACH-2) data in 2L liver (HCC) cancer (late ‘17/early ’18), and Ph III OS data (RANGE) in 2L bladder cancer (2018); 2018: Taltz Ph III data in axSpA; 2018: Tanezumab (w/PFE) Ph III data in Osteoarthritis pain
- GlaxoSmithKline(GSK): 2Q18: Potential generic Advair launch
- Novartis(NVS): 5/17/18: Aimovig/AMG334 FDA approval and launch. First to file in new migraine drug class; Mid-2018: Kymriah approval and launch in DLBCL (break-through designation); Mid-2018: FDA Approval and Launch of ACZ885/CANTOS; Mid-18: Kisqali data from MONALEESA-3 trial in Advanced breast cancer; 2H18: Entresto P3 PARAGON data in expansion indications that could add $2B opportunity
- Merck(MRK): 1H18: P3 Keytruda+chemo data in 1L NSCLC (KN-407) Non-Alimta Chemo; 1H18: KN-048 data in Head & Neck; 1H18: KN-042 data in 1L NSCLC monotherapy PDL1>1%: POSITIVE OS; 6/18/18 PDUFA Cervical Cancer from KN-158
- SHPG: Mid-18: Vyvanse approval in Japan expected; Mid-18: Covington, KY plasma facility gets FDA license/approval to start production; 2H18: SHP643 (HAE) US approval expected; 2H18: SHP663 (cancer: acute lymphoblastic leukemia) approval in US; 2H18: Xiidra (Dry Eye) EU approval expected; 4Q18: SHP621 P3 data expected for Eosinophilic Esophagitis (EoE), potential $1B market oppty; 4Q18: SHP643/Lanadelumab (HAE) P3 data in pediatric population; 12/21/18: SHP555: Prucalopride approval in US
- PFE: 1H18: Phase III data in 2L platinum resistant ovarian cancer (JAVELIN Ovarian 200) 1L renal cell carcinoma (2018); 1H18: Talazoparib/PARP inhibitor FDA submission based on positive EBRACA results; Talazoparib for breast cancer phase 3 data (1H18);June 2018: Xeljanz: FDA regulatory decision on Xeljanz for treatment of ulcerative colitis
- Roche: 1H18: Hemlibra P3 data in Hemophilia patients (non-inhibitor); 1H18: IMpower 130/131/132 data in NSCLC; IMmotion 151 data in Renal Cancer; IMpassion 130 data in breast cancer;1H18: CRC (Colorectal Cancer) expected (IMblaze 370 trial); 1H18: Melanoma 2 P3 trials; IMspire 150 & 170;
h) Ratings & Summary: (Price Targets Subject to change during earnings)
i) Interesting Chart: Stock Performance of NBI (biotech index) and DRG (pharma index) vs. S&P500 from 2017 to 1Q18
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