a) Key Areas of Investor Focus in Healthcare:
· Investors are digesting newsflow after the JP Morgan Healthcare Conf in early January.
· Tax Reform: The quantification of tax reform benefits was noted by select companies at the conference and the stocks went up materially. More broadly on tax reform, HC services companies are reform’s biggest beneficiaries, including recent updates from UNH, CVS, ESRX. There are debates in managed care about how much will fall to the bottom line or remain longer-term as it could be competed away in the form of better benefits or lower prices.
· M&A: Merger& acquisition activity has picked up and could continue as large healthcare companies repatriate overseas cash into the US. Today, two large mergers were announced as Sanofi (SNY) announced the acquisition of Bioverativ(BIVV) and Celgene(CELG) announced the acquisition of Juno Therapeutics (JUNO).
· Gov't Shutdown : During a shutdown, mandatory federal health programs like Medicare and Medicaid continue to pay providers. But much of how the government handles a shutdown is at the discretion of the White House. Some believe the shutdown will be brief and some think it could linger into 1Q. The ultimate bill will likely include a number of healthcare program extensions.
· Amazon (AMZN) entry into healthcare: We have been on many calls regarding Amazon (AMZN) and healthcare. It is unclear how AMZN will match scale of existing companies offset by better consumer engagement and ability to invest for years with no profit. Potential entry was also a factor in a potential AET-CVS merger. NVS' Sandoz just said to investors they see no material impact from an AMZN entry given 90% of purchasing flows through 3 large groups (WBAD, Red Oak, ClarisOne)
· Near-Term Material Therapeutic Readouts: Alzheimer's Interim (BIIB); Lung Cancer Interim (BMY); Migraine CGRP(TEVA,NVS,AMGN,AGN,LLY)
b) Rating Updates
· Ratings Changes:
- HCA: We upgraded HCA to 1/C from 2/C on 1/17/18
- TMO: We initiated on TMO with a 2/A rating
· Sentiment Changes:
- Raised HCA to Green from Gray after recent rating change
- Lowered ABC to Green from Blue after +26% stock move
- Lowered ESRX to Green from Blue on +30% move in stock
c) Best Ideas (at current price points): *High Conviction
- Healthcare Services& Providers: *ESRX, *ABC, *HCA
- Medical Devices: ABT, *ZBH
- Large Cap Pharma/Biotech: *AGN, *ALXN,* BMY,*PFE,*SHPG,*CELG
d) Material Updates to Ideas:
· Shire (SHPG): Sanofi to acquire Bioverativ (BIVV, a hemophilia competitor to SHPG) for $105/sh in cash or $11.6B. This represents a 64% premium to Friday's close. The BIVV takeout price of $105 implies 25-26x 2018E adj EPS and 19x on EV/EBITDA. BIVV’s takeout price is at a slight discount to 2017 biotech acquisitions in the 35x adj EPS range (ATLN 35x, MDVN 37x). SHPG’s current valuation of $145 implies 9.0x 2018 adj EPS& 9.5x EV/EBITDA. SHPG is trading at a meaningful discount to intrinsic value despite more diversification than BIVV. On a similar valuation to BIVV, SHPG would trade at $408 vs today at $145-150. We view SHPG as a take-out given this dislocation to fundamentals.
· Celgene (CELG): CELG has agreed to acquire Juno Therapeutics (JUNO) for $9.9bn in all-cash tender offer. The acquisition provides CELG with a powerful CAR-T platform technology including JUNO's JCAR-017 in DLBCL (CELG projects $3B in peak sales).
· Merck (MRK): Keynote-189 "chemo combo" 1L NSCLC (non-small cell lung cancer) trial hit PFS (progression free survival) and OS (overall survival) at the interim. Top-line release only and MRK seems likely to present the full data in April at an EU medical conference. This helps return MRK to IO (Immuno-Oncology) leadership in lung with both PFS and OS data vs. Roche with just PFS data. We still await data on IO/IO combinations offered by AZN and BMY, which are both running large clinical trials in NSCLC. We believe the NSCLC landscape remains fluid with many clinical datasets coming out over the next 12-18 months. Given the size and heterogeneous nature of the disease, we see the frontline lung market incorporating a number of players and regimens over time.
· United Health (UNH): Reported a good 4Q17 and increased 2018 guidance. UNH reported adj EPS of $2.59 (+23% y/y), beating cons $2.51. UNH reported revenue of $52.1B (+10% y/y), ahead of cons $51.5B. Medical cost trend was +5.5% in 2017 and sees +6% +/-50bps in 2018. UNH raised FY2018 adj EPS guidance for $12.30-12.60 vs prior $10.55-10.85 and cons $11.44. The +16% increase to the midpoint of FY2018 guidance was related to the lower tax rate stemming from the Tax Cuts and Jobs Act. UNH did not quantify how much of the tax benefit would be kept longer term as it could be competed away.
· CVS:Expects its effective tax rate to be approximately 27% in 2018 vs. 32-37% in prior years. This reduction in the tax rate represents an increase in cash flow of approximately $1.2 billion.
· HCA: We upgraded HCA to 1/C.Hospitals sentiment remains mixed. We see three key factors that drive our inflection thesis. First, we see HCA as a key beneficiary of tax reform that could boost FCF in 2018 and beyond by $400-600M and EPS by about $1.00 or +10-15%. Second, we believe volumes could stabilize or improve in 2018 after 2 years of a material deceleration. Third, we see capital deployment accelerating in the form of M&A, share buybacks, and a possible dividend.
· Thermo Fisher Scientific (TMO): We initiated on TMO with a2/A rating. TMO is the largest life science tools company with revenue growth in the mid-single digit range (+4-6% y/y) and operating margin expansion of +40-60bps per year resulting in low double digit earnings growth. TMO's recent results have benefited from tailwinds that include consistent strength in Pharma& Biotech, an improving Academic& Government environment, recent reacceleration in the Industrial& Applied end market, and continued strength in China. We are mixed on the current risk reward of TMO and would recommend re-visiting TMO at a better entry point or after an acquisition that could materially accelerate the company's revenue and EPS growth profile
e) Upcoming Events/Catalysts:
- 4Q17 Earnings will be the key focus for the next month
- 2/14-15: Leerink HC Conf (NYC)
- 2/16: UBS Therapeutics Day
- 2/20: Citi Immuno-Oncology Bus Tour
- 2/22-23: RBC HC Conf
f) Key Device& Bio-Pharma Product Events:
- AGN: 1H18: Ubrogepant for Migraine Ph3 trial ends with topline data; Esmya PDUFA
- BIIB: Anytime: Aducanumab interim data in Alzheimer's, full data in 2019
- BMY: 1H18: CM-227 P3 Data in 1L NSCLC; Many P2& P3 cancer trial results
- 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)
- LLY:2018: NOVO will launch their oral GLP-1 (Semaglutide); Will compete with LLY's Trulicity
- MRK: 1H18: Phase 3 PFS data from ECHO-301 in 1L Melanoma in combination with INCY' epacadostat (IDO) .
- PFE: Phase 3 PFS data for avelumab mon in 1L PDL1+NSCLC (JAVELIN Lung 100 trial)
- Roche: Now-2018: Full HAVEN3 (ACE910 in non-inhibitors) P3 data at medical conference TBD
g) On Radar/Potential Ideas/Deep Dive Analysis:
· GSK, NVS, LLY, HUM, BSX
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