Healthcare sentiment remains poor. Large cap bio-pharma remains out of favor despite attractive pipeline opportunities and dividend yields. Pipeline catalysts could re-ignite the group as well as any macro concerns that could spur interest in healthcare as a more defensive sector.
a) Key Areas of Investor Focus in Healthcare
· Year to Date (YTD): Bio-Pharma continues to underperform the overall markets with Medical Devices and outperforming. We see this as a compelling setup for Bio-Pharma names with strong pipelines or material disconnects with intrinsic value. We have also seen material weakness in certain healthcare services names after recent M&A was announced.
· M&A: See below: CIGNA announced the acquisition of Express Scripts (ESRX) DHR announced a large private company acquisition.
b) Rating Updates
· Ratings Changes: None
· Healthcare Sentiment Changes (see Sentiment definitions below):
- Lowered AMGN to Red from Yellow (see below)
- Raising ESRX to Blue from Green (see below)
c) Best Ideas (at current price points): *High Conviction
- 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:
· Amgen (AMGN): Conclusion of the Dutch Tender on 3/5. We could see a fade into upcoming fundamental overhangs (material biosimilar launches) as the tender may have been supporting the stock more recently. Coherus (CHRS) reiterated approval expectations for a biosimilar of AMGN's Neulasta ($4.5B in sales) in 2H18. We move our sentiment to Red.
· Cigna(CI) announced a definitive agreement to acquire the Pharmacy Benefits Manager (PBM) Express Scripts (ESRX) in a cash and stock deal valued at $67 billion, including the assumption of $15 billion in ESRX debt. ESRX shareholders will receive $48.75 in cash and 0.2434 shares of CI stock. This values ESRX at about $96 and represents a 31% premium for ESRX based on the prior day's closing. Debates have centered on regulatory risks, timing of potential accretion, and pending litigation against ESRX by Anthem (ANTM). The proposed deal along with the pending CVS-Aetna merger has amplified the trend towards vertical integration across healthcare services. The recent price action has been punishing for CI shares, -26% since announcing the deal, likely due to the deviation from CI's investor discussions around Medicare or Medicaid acquisitions (not a PBM) and concerns on the timing of deal closure. We find the 12.5% deal spread for ESRX as attractive and see optionality for another bidder like Walgreens (WBA) given large cap consolidation in the pharma supply chain industry.
Danaher (DHR): On 3/9, announced the acquisition of Integrated DNA Technologies (IDT), a privately held manufacturer of genomic consumables. DHR is paying roughly $1.8-$2bn (17x EBITDA, 6x sales) for IDT. IDT's revenues are over $300mn, with mid-teens core growth. IDT's primary business is the manufacturing of custom DNA and RNA (i.e., nucleic acid) oligonucleotides, which can be used in a variety of genomics applications (molecular biology research, gene editing, qPCR, next generation sequencing, etc), primarily within the academic and gov't and biopharma R&D markets. The transaction is expected to close in mid-2018, and we do not see any regulatory issues given DHR's small footprint in the genomics consumables market. IDT has stronger growth and higher margins than DHR and should be accretive on all fronts.
· Merck (MRK) & Bristol Myers (BMY): Focus is likely to grow on both stocks with AACR (American Association for Cancer Research) title submissions due on 3/14 and important upcoming Immuno-Oncology (IO) datasets potentially at April’s AACR Conf. MRK provided interim Progression Free Survival (PFS) and Overall Survival (OS) data for MRK’s KN-189 trial in Non-Small Cell Lung Cancer (NSCLC). BMY provided interim PFS data for BMY’s CM-227 in NSCLC. Ultimately, we look for more detailed data and hazard ratios (HR) to better understand the opportunity for MRK and BMY. In MRK's prior trials, the HR was 0.5 to 0.63 (lower is better). We see the first-line (1L) NSCLC market shaping up to be a duopoly market led by both MRK and BMY.
· United Health (UNH): Bloomberg reported that UNH is said to be among the bidders for Envision Health's (EVHC) ambulatory services unit. This continues the trend of UNH towards a vertically aligned business model. It seems like AET-CVS and CI-ESRX are trying to catch up.
e) Recent Pipeline Readouts & Updates:
· Allergan (AGN): Announced positive phase III topline results in the ACHIEVE I trial for the drug Ubrogepant in the treatment of acute migraine. ACHIEVE I results signal no safety issues for the product but we will learn full details at a medical conference presentation later in 2018. ACHIEVE II is expected to readout in the next 3-4 months. Acute and Chronic Migraine are large un-met needs as more than 1/3 of the market does not respond to therapy.
· Bristol-Myers Squibb(BMY): Announced the Phase III CM-227 study of Opdivo combined with Yervoy demonstrated improved progression free survival (PFS) vs chemo in first line (1L) non-small cell lung cancer (NSCLC) in patients with high tumor mutation burden (TMB) regardless of the PDL1 biomarker expression. BMY noted that the study continues to evaluate overall survival (OS) which is expected in 2H18 or early 2019. We see many clinical readouts in various cancers for BMY's immuno-oncology platform.
· Celgene (CELG): On 2/28, CELG received a refusal to file (RTF) on Ozanimod in Multiple Sclerosis from the FDA related to their December 2017 filing. CELG had expected FDA approval in 2018 but this will be delayed. At this time, CELG does not believe they will need to do another trial in MS. They implied the delay is related to additional pharmacology data needed from past trials. They believe they have the necessary data in house and therefore will not need to do a new clinical study. We believe this furthers concerns associated with management execution. Our estimates are not changing as it appears that 2020 guidance was given before the acquisitions of Impact (fedratinib) and Juno (JCAR017). These two products will likely offset the impact of delays in Ozanimod by 2020. We remain 1/B rated and note CELG has many promising P1 assets and many "singles" and "doubles" in Phase 2& 3 trials that will read out. We see $7.5-11B in pipeline revenue opportunity that will read out over the next 12-24 months.
· Pfizer(PFE): FAILED: Bavencio/Avelumab (I-O): Phase III data in 2L NSCLC (JAVELIN Lung 200), Missed Overall Survival (OS) end point. Could mean PFE's immuno-oncology agent is less efficacious as peers, which is tricky as the drug moves to more important combo therapy trials.
· Biogen(BIIB): Expands P3 Alzheimer's trial to better power end point. Stock falls 10-15% as investors think it could mean the trial is not going well. Also means an interim readout likely will not happen in 2018. FAILED: P2b study in ischemic stroke (ACTION 2)
f). Upcoming Events/Catalysts:
- 3/10-12: ACC (American College of Cardiology) Medical meeting in Chicago
- 3/12-14: Cowen Healthcare Conf in Boston (we are attending)
- 3/13-15: Barclays HC Conf
- 3/23: BDX hosts Wells and investors
- 4/14-18: AACR (American Association for Cancer Research) Medical Conf in Chicago
g) Key Device & Bio-Pharma Product Events:
· Allergan(AGN): 1H18: 2nd Ubrogepant for Migraine Ph3 trial results (ACHIEVE II); Esmya FDA approval expected in mid-18 after positive data. AGN does not expect an Adcom and is filing for a broad label; Atogepant Ph2B results for chronic migraine
· Alexian(ALXN): 2Q18: Expects phase III ALXN1210 PNH data (naïve and switch) and Soliris phase III NMO data in 2Q18. We expect the data to materially impact ALXN as they are critical to assessing ALXN's potential beyond Soliris in PNH, aHUS and gMG.
· BMY: 1H18: CM-227 trial P3 detailed data in 1L NSCLC; 1H18: CM-331 trial Opdivo data in 2L SCLC; 2H18: CM-459 trial Opdivo data in 1L HCC
· BIIB: 1H18: BIIB098: next gen Tecfidera, P3 data in Multiple Sclerosis
· 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): 2018: NOVO will launch their oral GLP-1 (Semaglutide); Will compete with LLY's Trulicity
· Novartis(NVS): Mid-2018: Kymriah approval and launch in DLBCL (break-through designation); Mid-2018: Aimovig/AMG334 approval and launch. First to file in new migraine drug class; Mid-2018: Launch of ACZ885/CANTOS Ph3 data at medical meeting; Mid-18: Kisqali data from MONALEESA-3 trial in Advanced breast cancer
· Merck(MRK): 1H18: Phase 3 PFS data from ECHO-301 in 1L Melanoma in combination with INCY's epacadostat.
· SHPG: 2H18: SHP643 (HAE) US approval expected; 2H18: Xiidra (Dry Eye) EU approval expected
· PFE: 2018: Phase III data in 2L platinum resistant ovarian cancer (JAVELIN Ovarian 200) 1L renal cell carcinoma (2018).
· Roche: Now-2018: Full HAVEN3 (ACE910 in non-inhibitors) P3 data at medical conference in future
h) Ratings & Summary:
Disclaimer: nextGENE is by invite only so please do not forward any nextGENE content to anyone. Potential references can be forwarded to gene@nextGENEcapital.com. nextGENE Capital is published as an information service for subscribers by invite only. It includes opinions as to buying, selling and holding various stocks and other securities. nextGENE retains its independence by NOT receiving compensation from any companies or funds highlighted in the newsletter. nextGENE analysts and writers attempt to buy, sell, and hold investments alongside invited subscribers that follow recommendations in the newsletter but timing differences exist. nextGENE Capital is not a broker or investment adviser and all insights should be taken as newsletter information and opinions only. Investing has risks and uncertainties that should be carefully considered before buying or selling stocks or funds. There is no guarantee to investment performance or wealth accumulation and nextGENE Capital is not liable for any losses that result from the content of nextGENE Capital's recommendations.