a) Key Areas of Investor Focus in Healthcare
· General Thoughts: Material sell-off in the markets over the past 2 weeks and healthcare underperformed. Bio-pharma sentiment remains out of favor...even after the latest macro sell-off from concerns of trade wars. Policy issues surfaced again this week in 2 ways. First, a vague announcement from the Trump administration for “major changes” in drug pricing in “about a month” has cast another shadow across the bio-pharma supply chain. Second, investors now appear worried that midterm election shifts could have uncertain implications for healthcare. For example, democrats recently sponsored proposals to impose stricter policies on managed care, a sector that had been a safe haven for investors. Beyond policy, skepticism on the benefits of vertical integration and acquisitions continues to grow. Many healthcare mergers are trading at +15-25% spreads, like CVS-Aetna (AET) and Cigna (CI)-Express Scripts (ESRX). In bio-pharma, pipeline catalysts could re-ignite the group but the recent setback by ABBV's pipeline failure does not help investor confidence.
· Year to Date (YTD): Bio-Pharma continues to underperform the overall markets with Medical Devices 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: GSK and Reckitts Benckiser announced separately they have ended discussions about a potential acquisition of PFE's consumer health-care business. It is unclear if this means PFE will spin or keep the business but it appears PFE did not get the $20B it wanted. UnitedHealth also ended discussions with Envision Health (EVHC) regarding a possible acquisition of its outpatient provider segment.
b) Rating Updates
· Ratings Changes: None
· Healthcare Sentiment Changes: (see Sentiment definitions below)
- Raising ABC to Blue from Green (see below)
- Raising ALXN to Blue from Green (see pipeline update below)
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:
· AmerisourceBergan (ABC): Investor concerns have grown on the impact of a prolonged closure of ABC's PharMEDIUM segment's Memphis compounding pharmacy. ABC had expected this to reopen by the end of March but this is now less likely. ABC is expected to provide an update by the end of this month or in 1Q earnings. No change to our margin inflection thesis as ABC continues to migrate Rite-Aid stores acquired by Walgreens. The margin expansion from leveraging new distribution centers remains on track.
· Abbvie (ABBV): traded down -13% on ABBV's oncology drug Rovalpituzumab Tesirine (Rova-T). ABBV reported results from the phase 2 TRINITY trial and efficacy data in-line with standard of care (chemo) for small cell lung cancer (SCLC). Investors had expected a materially better outcome. ABBV will NOT submit the drug for Accelerated Approval as previously planned. Final Phase 2 data is expected at a medical meeting (ASCO) in June 2018. Phase 3 data is expected in 2H19. ABBV acquired Rova -T with the Stemcentryx acquisition in 2016 for $5.8B, plus $4B in sales milestone payments. ABBV saw roughly $5B in peak sales for Rova-T, including multiple follow-on indications. The failure calls into question the whole ROVA-T platform for solid tumor oncology. Stemcentrx became the cornerstone of AbbVie’s oncology platform. This was a material pipeline setback that exacerbates ABBV’s issue as Humira ($20B in sales out of $31B total) faces biosimilar competition.
· Express Scripts (ESRX): Since Cigna announced the acquisition of ESRX, CI's stock is -15% and ESRX's stock is -18%. Investors have expressed broadly negative feedback amid expectations for a horizontal government Managed Care acquisition and a widening of the deal spread for ESRX is now +26%. The market is suggesting that the path forward may come into question as government approval for the merger appearsmuch less than 100% certain based on the stock prices. There will be read-throughs from the AT&T-Time Warner antitrust court case that started recently and may provide a ruling in mid-May. We see a compelling business model emerging at a good risk-reward that could replicate United Health's success as an integrated healthcare platform but at a 50% discount . We like the CI-ESRX merger better than CVS-AET as it establishes a strong business model similar to United Health (UNH). We see the CI-ESRX deal as more capital efficient than AET-CVS which is built on a bricks and mortar thesis. That said, both mergers have the potential for strong FCF generation. Waiting is the hardest part and we recognize that anti-trust scrutiny remains the key uncertainty. We believe the mergers will close given market forces that have driven the success of integrated healthcare models like United Health (UNH) and Kaiser (private). However, we acknowledge that it is very difficult to predict regulatory outcomes and court challenges. In any event, we like ESRX on a stand-alone basis in the $70-80 range with compelling underlying fundamentals, a new growth vertical from the eviCore acquisition, and strong cash flow generation.
· ZimmerBiomet (ZBH): While we have been wrong so far on our inflection thesis post the Zimmer-Biomet merger, the second part of our thesis on board driven management changes is taking place. The board has appointed a well regarded CEO, Bryan Hanson, who was a protégé under BAX's Joe Alimeda when both were at Covidien. ZBH also appointed a new head of investor relations, Coleman Lannum, who is also well regarded by investors and analysts. Recently, Coleman has convinced the sell side to lower estimates for 2018-19 due to a longer than expected turnaround. Consensus recently has moved to $7.80 from $8.30 in 2018. While the stock has been weak on this, we see this as the right move as it sets up ZBH for lower expectations. Given the wide valuation discount to peers, we do not see much downside to ZBH from current levels. We need to see topline stabilize and return to growth for the stock to begin working, which we hope to see signs of in 2H18. We plan to give the new CEO about 12 months to show signs of a turnaround.
e) Recent Pipeline Readouts & Updates:
· Roche (RHHBY): IMpower 150 trial in 1L NSCLC(non-small cell lung cancer) hits OS(overall survival) co-primary endpoint at interim. An OS benefit was observed for Arm B (Tecentriq + Avastin + chemo) vs Arm C (Avastin + chemo). This is good news as it demonstrates the synergistic effect of adding Tecentriq to Avastin, but we still need more data for other Roche trials as well as BMY & MRK trials to better assess the NSCLC landscape. NSCLC is a high unmet need and represents a competitively intense and complex area with multiple trials from multiple companies. We are encouraged that BMY, MRK, and Roche have now all reported positive interim data ahead of important medical conferences.
· Alexion (ALXN): Key pipeline product ALXN1210 met primary and key secondary endpoints. ALXN reported positive top-line results of the Phase 3 study of ALXN1210 in treatment-naïve patients with paroxysmal nocturnal hemoglobinuria (PNH). ALXN1210 met the co-primary endpoints showing non-inferiority to Soliris in transfusion avoidance (ALXN1210: 73.6% vs. Soliris: 66.1%) and normalization of lactate dehydrogenase (LDH, disease biomarker) levels (53.6% vs. 49.4%). The study also met all four key secondary endpoints. Superiority narrowly missed but the study was not powered to do so. We are encouraged by the demonstration of non-inferiority to Soliris and numerically stronger results. While we would have liked to see superiority, we believe doctors and patients will appreciate a similar efficacy to Soliris with a more convenient 8-week dosing schedule vs current every 2 weeks. We look forward to data from the Phase 3 ALXN1210-Soliris Switch study in 2Q18.
· 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.
· Allergan (AGN): Competitor Biohaven(BHVN) announced topline of two phase III studies of rimegepant, a competitor of AGN's ubrogepant, for acute treatment of migraine through an oral CGRP mechanism. BHVN met both primary endpoints with statistically significant benefit. This further validates the CGRP mechanism and the role of oral drugs in this class for migraine. The effect size (placebo-adjusted treatment difference) was weaker to no better than AGN's recently reported ACHIEVE I trial, which is positive for AGN Next, we look for long-term safety studies in 2H18 from both AGN and BHVN.
f). Upcoming Events/Catalysts:
- 1Q18 Earnings Start in mid-April
- 4/9: Leerink Healthcare Services Roundtable (NYC)
- 4/12: Credit Suisse Therapeutics Day (NYC)
- 4/13–4/17: American Society of Cataract & Refractive Surgery (Chicago)
- 4/14-18: AACR (American Association for Cancer Research) Medical Conf in Chicago
- 4/21–4/27: American Academy of Neurology (AAN)
- Mid-May: AT&T-Time Warner court case ruling with potential read-throughs to CI-ESRX and AET-CVS
- g) Key Device & Bio-Pharma Product Events:
· Allergan(AGN): 1H18: 2nd Ubrogepant for Migraine Ph3 trial results (ACHIEVE II); Esmya FDA approval expected in 2H18 after positive data offset by hold in EU. Atogepant Ph2B results for chronic migraine
· Alexian(ALXN): 2Q18: Expects phase III ALXN1210 PNH data (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.