Healthcare Bi-Weekly Update: 6/7/18
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a) Key Areas of Investor Focus in Healthcare: Drug pricing was met with investor skepticism around whether President’s Trump’s recent remarks of “voluntary, massive” cuts in two weeks will result in meaningful changes. But, the “event” is now on radars for the next few weeks as something to watch. Investors are watching the 6/12/18 DOJ court decision on the AT&T-Time Warner merger as a barometer for the government’s ability to challenge vertical integrations, including the CVS-AET and CI-ESRX mergers. Given the wide spreads, the risk-reward skewed into the event with meaningful appreciation if the gov't loses the case regarding vertical integrated deals. We highlight some of the key areas of focus for investors below:
- Merger Discounts to Take-Out Price:
- Aetna (AET): +13% spread to CVS take-out
- Express Scripts (ESRX): +21% spread to CI take-out
- Shire (SHPG): +19% spread to Takeda take-out
- M&A: We are seeing above average spreads to take-out given elevated uncertainty around the regulatory environment. The latest deals are more vertical than horizontal but the current regulatory environment is very difficult to predict. 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 on 6/12.
- Oncology Medical Conferences: We have had 2 major medical oncology conferences (ASCO & AACR). The good news is that oncologists are very excited to see the innovation translating into clinical outcomes and new products. Many oncology areas have used the same standards of care for decades. Immuno-oncology agents are showing deep and durable responses in patients with specific biomarkers. Oncology stocks like Bristol-Myers (BMY), Merck (MRK), Roche (RHHBY), Astrazeneca (AZN) and many small-mid cap stocks have been very volatile as investors attempt to understand the revenue and earnings impacts by company. We are following the data and will have a deep dive oncology analysis in the near future.
b) Rating Updates
- Long-Term Ratings Changes: None
- Healthcare Sentiment Changes: None
- Trading Thoughts: Despite compelling product cycles, bio-pharma stocks remain under pressure but with strong dividend yields in many cases. We would prioritize those ideas in our Best Ideas below.
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:
· Allergan (AGN): With the stock under pressure, Allergan (AGN) mgt announces plans to sell its Women’s Health and Infectious Disease businesses following the company’s ongoing strategic review. Allergan’s CEO commented that Allergan will look to focus on four main therapeutic areas: medical aesthetics, CNS, GI, and eye care. A more focused and nimble AGN is likely good news but will do little for the stock as bio-pharma stocks are largely out of favor and the endless Trump commentary on drug pricing doesn't help. Ultimately, it is execution on financial goals and potential pipeline catalysts that will move AGN, which have both been moving in the right direction.
· Express Scripts (ESRX): 1Q18 was strong and we saw an acceleration of EBITDA growth in the Core PBM. We believe the CI-ESRX merger creates a more integrated healthcare company like UNH. The implied take-out is $92, +22% from current prices as investors look for better regulatory visibility into vertical mergers. With and without the CI merger, we believe sentiment is shifting on ESRX to a growth story in medical and pharmacy benefits and a materially mispriced asset with strong cash flows.
· Gilead (GILD): GILD reported another quarter below expectations, marking 3+ years of revenue and EPS misses. However, the launch of 2 new products(Yescarta & Bictarvy) and future potential launches could make GILD interesting over the next few quarters if the base business can stabilize. GILD has some interesting pipeline readouts in rheumatoid arthritis, ulcerative colitis, and Crohn's disease and in NASH.
· Celgene (CELG): 1Q18 was strong and CELG’s pipeline continues to progress. Revenue growth of +19.5% was driven by +15% volume growth and +4.5% price. We acknowledge recent pipeline setbacks but the stock is missing other strong pipeline assets and strong cash flow to continue building the pipeline. We were encouraged by plans to re-file Ozanimod in 1Q19 without the need for additional clinical trials. CELG still sees Ozanimod as serving a potential $4-6B opportunity in Multiple Sclerosis, Crohn’s Disease, and Ulcerative Colitis. In addition to many promising P1 assets and many "singles" and "doubles" in Phase 2 & 3 trials, CELG also has a few blockbuster Ph1& 2 assets including CELMoDs (next generation Revlimid), a partnership with Bluebird for a next gen Multiple Myeloma product, and two promising late-stage acquisitions (Juno Therapeutics and Fedratinib). Over the next 3 years, CELG will generate $30B for capital deployment to help round out the pipeline. Ultimately, we see clinical data driving stock sentiment and there are many pipeline events over the next 12 months that could materially impact the stock price.
e) Recent Pipeline Readouts & Updates: We are encouraged by the progress of ALXN's pipeline as well as the progression of key assets by LLY, JNJ, Roche, and GILD.
· 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.
· Allergan (AGN): Reported positive results from their second ubrogepant Phase III oral CGRP study for acute migraine. The efficacy was in line with the previous Phase III data, and the safety profile remains relatively clean. This places ubrogepant on track for potential 2020 introduction, and will leverage AGN's already in-place Botox migraine commercial platform. We believe AGN's migraine pipeline could add +$1B in revenue over the next 3-4 years. We see the ubrogepant safety study in late 2018 as the last study before filing.
· Johnson & Johnson (JNJ): Announces positive long-term data from its depression treatment esketamine nasal spray. Esketamine delayed relapse of symptoms and continued to be tolerable, with no new safety signals observed following repeated, long-term dosing.
· Eli Lilly (LLY): FDA approves 2mg dose of Lilly/ Incyte’s Olumiant (baricitinib) for Rheumatoid Arthritis and rejected the 4mg dose. FDA also placed an extensive black box warning for increased risk for serious infections, hematologic malignancies, and thrombosis. The EU and Japan had already approved a less restrictive label that included both the 2 & 4 mg doses. While the FDA’s decision is a positive for both Eli Lilly and Incyte—especially given the CRL(Continuing Resolution Letter/Hold) last year, the commercial outlook is less certain with the approval of only the 2mg and black box warning potentially tempering sales. Ultimately real-world experience will clarify the side effect profile and prescribers need to become more familiar with the JAK inhibitor class, which includes Pfizer’s Xeljanz and potentially late stage competitors AbbVie’s upadacitinib and Gilead/Galapagos’ filgotinib.
· Novo Nordisk/LLY: Novo Nordisk reports superior HbA1c activity of oral diabetes semaglutide over Lilly’s Jardiance. In the phase 3 PIONEER 2 study. Novo’s oral GLP-1 analog demonstrated statistically significant improvements in HbA1c over Lilly’s SGLT-2 inhibitor Jardiance, although data were not provided. Differences in weight loss were not significant. Oral sema was also associated with an 11% discontinuation rate due to AEs (Adverse Events) vs. a rate of 4% for Jardiance. Oral sema is currently in a number of clinical studies, with PIONEER 4 data (vs. Victoza) expected 3Q18. These concerns have been an overhang on LLY's stock.
· Gilead (GILD): Announces positive phase 2 data for filgotinib in psoriatic arthritis and ulcerative colitis. The DMC recommended progression into phase 3. Filgotinib is also in phase 3 development for RA, with data from FINCH2 (biologic-inadequate responders) expected 2H18. Filgotinib is a JAK1 inhibitor.
· Johnson & Johnson (JNJ): Discontinues Darzalex and anti-PDL1 combination studies in solid tumors. The decision comes after the DMC found no benefit of Darzalex with Roche’s Tecentriq and higher deaths in the phase 1b/2 study in 1L NSCLC.
· Roche (RHHBY): Reports positive top-line Tecentriq 1L non-squamous NSCLC data. Roche announced the phase 3 IMpower130 study of Tecentriq with chemotherapy met the co-primary endpoints OS and PFS. The study is likely to invite comparisons to Merck’s KN-189, also in non-squamous NSCLC, which demonstrated strong PFS and OS data.
f). Upcoming Events/Catalysts:
- 6/5: MDT Analyst Day
- 6/5-6/8: Jefferies Healthcare Conf (NYC)
- 6/12: DOJ court decision on the AT&T-Time Warner merger. Implications for CVS-AET and CI-ESRX mergers
- 6/12-6/14: Goldman Sachs Healthcare Conf (L.A.)
- 6/18: MYL FDA Action Date on Neulasta Biosimilar
g) Key Device & Bio-Pharm Trial Events: (we are still updating key trial events after 1Q18 earnings)
· Allergan (AGN): 2H18: Ubrogepant for Migraine safety study; Atogepant Ph2B results for chronic migraine
· Alexion (ALXN): 2Q18: Expects Soliris phase III NMO data in 2Q18
· 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); 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
· Biogen (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
· Shire (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
· Pfizer (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 (RHHBY): 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 Charts
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