Highlights:
- Judge rules against US DOJ and approves merger between AT&T-Time Warner. Positive implications for pending mergers CVS-AET and CI-ESRX.
- Sentiment Changes: NVS raised to Green from Gray. HCA lowered to Gray from Green.
- 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) with high tumor mutational burden with a 2/20/19 action date. This was unexpected...If approved, this would be the first non-chemo therapy for patients with NSCLC. Stock is +10% over past 3 weeks.
- SHPG: Obtains FDA approval for plasma manufacturing in Covington, KY facility earlier than expected. Supports commentary for an acceleration in revenues and margins from ability to manufacture.
- CELG: Watch for June Phase 3 data from Luspatercept in MDS(myelodysplastic syndromes) and beta-thalassemia. If safe and clinically effective, the drug could be adopted quickly for low-risk MDS in 2L setting. P2 data was strong; stock sentiment is at an all-time low after a pipeline delay & failure.
a) Key Areas of Investor Focus in Healthcare:
- M&A: On 6/13, Judge Leon ruled against the US government and approved the merger between AT&T and Time Warner. The decision provides more support to vertical integrations and bodes well for the CVS-AET and CI-ESRX deals to clear anti-trust review. Deal spreads have materially narrowed since the ruling and positions both mergers to close within 6-9 months.
- Merger Discounts to Take-Out Price:
- Aetna (AET): +8% spread to CVS take-out (+13% on 6/5)
- Express Scripts (ESRX): +15% spread to CI take-out (+21% on 6/5)
- Shire (SHPG): +19% spread to Takeda take-out (+19% on 6/5)
- Drug Pricing: A key theme emerging from investor conferences and Washington rhetoric is the need for a change in the rebate structure. Payors/PBMs also recognize the issue. An emerging trend is pricing drugs at list price or closer to net, which would be a headline victory but have minimal impact on the healthcare system. Rebates would shift to fees so that volume & value were still getting recognized. Payors have also cited the ceiling for deductibles and that employer's ability to raise deductibles may be nearing an end.
- Trade Wars with China: U.S. healthcare sector revenues have about 2% of revenues coming from China. Within medical devices specifically, China is currently the second largest medical device market in the world at $30B in sales (7-8% of the worldwide MD&D market). However, China represents about 5% of large-cap Medical Device sales with ABT, BAX, BDX, MDT, and VAR having the most exposure.
b) Rating Updates
- Long-Term Ratings Changes: None
- Healthcare Sentiment Changes:
- Raising NVS to Green from Gray on recent stock weakness and attractive risk-reward
- Lowering HCA to Gray from Green as stock has been outperforming and was up +23%. YTD We now see the short-term risk-reward as more balanced within the context of our longer-term thesis.
Healthcare Sentiment Rating 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
- Medical Devices: ABT, *ZBH
- Large Cap Pharma/Biotech: *AGN, *ALXN, *BMY, *BIIB, *CELG, *GSK, *PFE, SHPG
d) Material Updates to Ideas & Industry:
- Diabetes: The American Diabetes Association (ADA) held its annual meeting in Orlando. It's an exciting time in diabetes devices, with significant innovation and the potential for a material improvement in patient outcomes. Abbott Labs' (ABT) Freestyle Libre, a key part of our thesis, displayed posters on independent studies demonstrating positive outcomes utilizing Libre vs. fingersticks, among Type 2 patients. Libre is being positioned as a true fingerstick replacement for the broad insulin using population, creating a sizeable market opportunity. Medtronic (MDT) highlighted its 670G pump and recent pediatric indication. MDT remains the only continuous glucose monitoring (CGM) automated pump on the market
- Stryker (SYK): CFO met with investors and implied they never bid on Boston Scientific (BSX) despite rumors in the Wall Street Journal. It also sounds like knee growth returned to more normal growth after a weak 1Q18.
- Amazon/JPMorgan/Berkshire Hathaway Healthcare Venture: Selected Dr. Atul Gawande to become CEO of their new non-profit partnership, which hopes to attempt to improve the health care costs and quality for the employees of the three companies before rolling out to the broader market. Dr. Gawande is a well-known surgeon, writer, and public health researcher and is a professor in the Department of Health Policy and Management at the Harvard School of Public Health and Harvard Medical School. We believe the selection means the venture will likely seek more longer-term goals with less disruption near-term.
- Roche acquires Foundation Medical (FMI) for $5B or 11.5x EV/Sales. Roche already owned 40% of FMI. This will be a bolt-on addition to Roche's large diagnostics franchise.
- Managed Care: State Filing review shows the non-profit Blues improved individual market medical loss ratios by 700bps y/y. This means the non-profits are making a lot more money that the last 3-4 years and could imply the beginning of a negative underwriting cycle. The non-profits may return capital in the form of lower pricing to deplete their surpluses, resulting in a tougher pricing environment for publicly traded health plans.
- Allergan (AGN): AGN shares have rallied +15% in the two weeks since activist investor involvement picked up two firms Senator Capital and Appaloosa Capital. AGN has added four new Board members since the start of 2017. Splitting the CEO and Chairman roles was also recommended by Senator/Appaloosa. From a pipeline perspective, positive Phase 2/3 data from atogepant (anti-CGRP) for migraine prevention provided a boost to the pipeline. Next up is the initial Phase 3 data for abicipar (eye disease) that we expect in 2H 2018.
- Shire (SHPG): Covington, KY plasma facility gets FDA approval and license to start production. This supports SHPG commentary for an acceleration in revenues and earnings as the year progresses from the new immunology/plasma plant obtaining FDA approval. This happened a few months ahead of schedule.
e) Recent Pipeline Readouts & Updates:
- Alexion (ALXN): At the European Hematology Association (EHA) annual meeting, Alexion’s ravulizumab (ALXN1210) included incremental data from the phase III PNH-naïve results that were top-lined earlier this year. The presentation suggests that in addition to more consistent efficacy, with less frequent dosing, ravulizumab results in much faster C5 inhibition and lactate dehydrogenase (LDH) normalization than Soliris. Stock is +15% over past 3 weeks.
- Amgen (AMGN): On 6/4, Mylan (MYL) received approval for its biosimilar Neulasta, a $4B US branded drug sold by AMGN. MYL will launch its biosimilar under the name Fulphila in the near future. With limited data on biosimilars in the US, we will be watching the impact of Fulphila uptake on Neulasta.
- Bristol-Myers (BMY): FDA accepts application for Opdivo plus low-dose Yervoy for treatment of 1L non-small cell lung cancer in patients with high tumor mutational burden with a Feb 20 action date. We view the FDA acceptance of BMY's application for Opdivo + Yervoy in 1L NSCLC as positive news as it demonstrates BMY's combo has a path to market despite high investor skepticism. If approved, this would be the first non-chemo course of therapy for patients in NSCLC, a key part of our BMY thesis and an option physicians and patients have wanted for decades. Stock is +10% over past 3 weeks.
- GlaxoSmithKline (GSK): GSK’s ViiV Healthcare segment, which focuses on HIV medicines, announced top-line results from the two phase III studies (GEMINI 1&2) in treatment-naïve HIV that tested its two-drug regimen of dolutegravir (DTG) and lamivudine (3TC) compared to a three-drug regimen. ViiV reported no treatment-emergent resistance in patients who experienced virological failure, but no numbers were provided in the press release. Full data will likely come in Oct 2018. GSK will file other drugs on this regiment in 2H18. This is a positive datapoint in our GSK thesis and supportive of a disruptive regiment in HIV therapy from existing 3 drug therapies.
- Allergan (AGN): Announced 2 important pipeline updates: First...AGN announced positive Phase 2b topline data for atogepant for migraine prevention (prophylactic). We view the data as highly encouraging, with efficacy on par with monoclonal CGRP (calcitonin gene-related peptide) antibodies. Liver toxicity data was in-line with placebo after three months of daily dosing. Efficacy was statistically significant at all five dose levels. Allergan plans to discuss with the FDA if the data is registrational before commencing a pivotal Phase 3. We see AGN positioning to build a +$2B migraine portfolio that includes Botox, ubrogepant, and now atogepant. Second...AGN reported positive topline results from the first of two Phase III studies of its glaucoma treatment Bimatoprost/Lumigan SR. The sustained-release, biodegradable implant is being developed for the reduction of intraocular pressure (IOP) in patients with open-angle glaucoma or ocular hypertension and showed promising results in the Phase III in both doses tested. Additional safety data from this study and results from a second Phase III study with an identical design will be reported in 1H19. We expect Bimatoprost SR will supplement Allergan’s glaucoma pipeline and see this as another "single" in AGN's portfolio and a sub $1B opportunity.
- Roche (RHHBY): Reports positive interim P3 IMPower133 results of Tecentriq plus chemo in extensive stage 1L small cell lung cancer (SCLC). The study met both overall survival (OS) and progression free survival (PFS) co-primary endpoints at the first interim analysis. SCLC represents 15% of all lung cancer diagnoses with extensive-stage disease accounting for approximately two thirds of these patients at diagnosis. This is the first I-O chemo combination to show P3 efficacy in first-line SCLC. Data will likely be presented at ESMO (Oct 2018)
f). Upcoming Events/Catalysts:
- 6/27: Citi hosts 2Q Hospital Diligence Day
- 6/28: Walgreens reports F3Q18
- 6/28: MCK Investor Day in Boston
- 6/29: MYL Investor Day
- July-Aug: 2Q18 Earnings
g) Key Device & Bio-Pharm Trial Events:
- Alexion (ALXN): 2Q18: Expects Soliris phase III neuromyelitis optica (NMO) data in 2Q18
- Celgene (CELG): Mid-18 or by end of June: Phase 3 data from Luspatercept in MDS and beta-thalassemia (BELIEVE & MEDALIST trials). If safe and clinically effective, the drug could be adopted quickly for low-risk MDS in 2L setting. A 30% placebo-adjusted effect is a good result, while a >40% effect would significantly beat expectations. If the Luspatercept arm were to achieve an absolute transfusion independence rate of <30% we would view this negatively
- Bristol-Myers Squibb(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)
- Novartis (NVS): Mid-2018: FDA Approval and Launch of ACZ885/CANTOS; Mid-18: Kisqali data from MONALEESA-3 trial in Advanced breast cancer
- Pfizer (PFE): Talazoparib for breast cancer phase 3 data (1H18); June 2018: Xeljanz: FDA regulatory decision on Xeljanz for treatment of ulcerative colitis
h) Ratings & Summary: (Price Targets Subject to change during earnings)
i) Interesting Charts:
Centers for Medicare & Medicaid (CMS) Healthcare spending past and projected: Healthcare spending growth has decelerated to the +5-6% range from +8-10% in the early 2000's
CMS sees Prescription drug spend in the 10% range out of total healthcare costs.
