Healthcare Bi-Weekly Update: 7/16/18
Highlights:
- We recently met with the following CEOs/CFOs: HCA, ALXN, ZBH, VRX (see below)
- Merger discounts have closed substantially since the AT&T-Time Warner ruling came out...and have held despite the gov't recent appeal.
- Amazon's acquisition of PillPack, a mail pharmacy with $100M in revenue, marks its official entry into Healthcare. Stocks have been volatile in the Pharma Supply Chain. We would buy CVS, ESRX.
- BIIB: +20% on positive Phase 2 Alzheimer's trial data for BAN2401. Supports BIIB's P3 Aducanumab in Alzheimer's.
- CELG: Positive data in both Phase 3 trials for Luspatercept. Stock +8%.
- Lowering Sentiment Ratings for AET & BIIB
- Spins get popular: GE announces healthcare spin. NVS announces Alcon spin.
a) Key Areas of Investor Focus in Healthcare:
- 2Q18 Earnings start next week: FX could be a bigger headwind than expected given currency volatility in 2Q.
- More Healthcare Spins: GE announces a spin of its Healthcare segment. Novartis (NVS) announces a spin of its Alcon segment. Both stocks rally.
- Pipelines Drive Outperformance: Positive pipeline events from BIIB (+20%) and CELG (+8%) drive stocks up.
- Merger Discounts to Implied Take-Out Price: Merger spreads have substantially closed since the AT&T-Time Warner deal was approved. While the gov't is appealing, investors appear to see much higher odds the deals below will close by 4Q18 or early 2019.
- Aetna (AET): +5.5% spread to CVS take-out (+13% on 6/5)
- Express Scripts (ESRX): +11.5% spread to CI take-out (+21% on 6/5)
- Shire (SHPG): +15% spread to Takeda take-out (+19% on 6/5)
b) Rating Updates
- Long-Term Ratings Changes: None
- Healthcare Sentiment Changes:
- AET: Lowering Sentiment rating to Green from Blue as the CVS merger spread has materially closed to +5% from double digits. At current prices, we think it makes more sense to own CVS. We are also removing AET from our best ideas list.
- BIIB: Lowering Sentiment rating to Green from Blue after 20% move in stock on positive Ph 2 data in an Alzheimer's trial.
Healthcare Sentiment Ratings 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, *CVS, *ESRX
- Medical Devices: ABT, *ZBH
- Large Cap Pharma/Biotech: *AGN, *ALXN, *BMY, BIIB, *CELG, *GSK, *PFE, SHPG
d) Material Updates to Ideas & Industry:
· HCA: We recently met with HCA’s CEO and Senior Management team. Overall, the tone was positive on key metrics including improved volume growth, stable contract pricing and improved cost control efforts. Volume growth and labor costs have improved from a tough 2017. With the stock up 20% YTD, our thesis is for stabilization and possibly an improvement to volumes after 2 years of material deceleration following a spike from the Affordable Care Act. We will be watching key metrics to see if revenue growth and margins continue to improve from easy comps in 2Q-4Q17.
· Alexion (ALXN): We recently met with the CFO of ALXN. He highlighted both the defensive and offensive strategies that management is pursuing at ALXN. On the defensive, their IP strategy is to extend Soliris to 2027 with 3 patents in US/EU and 1 combined patent in Japan. If they do not get the extended patents, they can appeal and the process could take years. On the offensive side, they are pursuing a rapid conversion to change the market to next-gen ALXN1210. The data for 1210 has been strong so they have years to change the market to a better drug. They continue to expand Soliris into new indications and see the MG indication as a meaningful opportunity that may ramp quickly since patients are identified. They view NMO as another area but recognize this as a high risk profile (data is expected at end of 2018). The recent Wilson Therapeutics acquisition closed and is an offensive example of how ALXN wants to diversify into other rare disease areas. Wilson has a differentiated mechanism of action to attack the causes of copper in the liver. This exemplifies ALXN’s approach to M&A focus on clinical stage, rare, devastating diseases where they can manage the deployment of capital with acquisitions, collaborations, and partnerships; tied to success based payments. Stock is +15% over past 4 weeks.
· Zimmer-Biomet (ZBH): We recently met new CEO Hanson. He is acutely focused on the ZBH turnaround, both the supply chain remediation and FDA issues at the Warsaw facility. Both issues were more complex than expected, resulting in a longer turn-around by late 2019. He re-affirmed his conviction in getting supply back on the market in 2H18. He also remained committed to many product launch timelines in 2H18 that should help close the gap to competition in the ortho market. He hopes for mid-single digit revenue growth by 2H19, continued debt paydown to below 3x, and then active portfolio management through bolt-on M&A to accelerate revenue growth. These should drive margin expansion in 2H19 as well. We believe the stock could break out if the new CEO can address the following issues: 1) Supply Chain issues are fixed resulting in normalized supply levels. 2). FDA observations/concerns in Warsaw facility are adequately addressed. 3). Product launches meet timelines and ramp. We will be looking for updates on the Persona knee, Cementless knee, and Rosa Robotics platform launches. 4). Margins rebound back to prior levels.
· Valeant (VRX/BHC): We met with Valeant (VRX) Joe Papa, CEO. Valeant changed its name to Bausch Health Care (BHC, Not Covered) effective Monday, 7/16. They have transitioned from selling assets to beginning to operate the company in 3 core areas, eye care (Bausch & Lomb), Dermatology, and Gastrointestinal (Salix). He sees EBITDA growth of +5-8% through 2021 drive by sales and margin expansion from trough levels. However, leverage remains a key concern at 7x Debt/EBITDA. He implied that 3-4x makes sense, which implies the need to raise equity though a sizeable secondary, which would shareholders.
· Amazon(AMZN): Amazon announced the acquisition of PillPack, a start-up online pharmacy with $100M in revenue that delivers medications in pre-sorted, dose packaging and coordinates refills and renewals. The news could be overhang to sentiment across the Rx channel. In the past, it has been very difficult to get people to shift purchasing patterns. Despite a strong marketing campaign, the Wal-Mart $5 generic drug program did not result in market shares shifting and caused very little disruption. While this transaction establishes an initial foothold for Amazon in the mail pharmacy space, it will take time to materially scale up. CVS, PBMs, & Drug Dist’s were down as much as 3-8%. As a result, we see limited disruption to the healthcare system from the acquisition and would buy CVS and ABC on related weakness.
· Pfizer (PFE): Announces plans to restructure organization in 2019. The plan calls for three businesses: Innovative Medicines (to include biosimilars, anti-infectives, and sterile injectables); Established Medicines (to include off-patent branded and generics); and Consumer Healthcare (to include all Over-The-Counter healthcare products). Currently the company is organized into Innovative Medicines and Essential Health. We see this as a pre-cursor to a potential split of PFE into these 3 entities. PFE also stated that it will be deferring its July 1st price increases until the President’s blueprint goes into effect or the end of the year. This represented +7-8% increases on average on only 40 out of 400 drugs. We expect this to be a key topic of discussion on 2Q earnings calls later this month.
e) Recent Pipeline Readouts & Updates:
· Biogen (BIIB): BIIB and Eisai announced positive Phase 2 clinical trial results from the Alzheimer’s drug BAN2401. Biogen is +20% on the positive topline results. The co-sponsored trial of BAN2401 produced statistically significant slowing in clinical decline and reduction in beta amyloid accumulation. Our Take: The trial for BAN2401 provides proof of concept support for the amyloid hypothesis. BAN2401's top-line data suggest that removing amyloid slows the progression of Alzheimer's and provides a reason for optimism that BIIB's aducanumab's program could also yield positive results. As part of our thesis, we viewed BIIB as having the best Alzheimer's pipeline, which carries a high risk, high reward profile. We are highly encouraged by BIIB's results and believe it strengthens the odds that BIIB's aducanumab may work which could read out in the next 12-18 months.
· Celgene (CELG): CELG announced two positive pipeline developments on the pipeline drug Luspatercept. CELG met both primary and key secondary endpoints in the Phase 3 MEDALIST trial for the drug Luspatercept in patients with myelodysplastic syndromes (MDS) in refractory patients. In a different Luspatercept trial, Celgene announced that the Ph. III BELIEVE study of patients with transfusion-dependent beta-thalassemia achieved its primary and key secondary endpoints. U.S. and EU regulatory filings will be submitted in1H19 based on the BELIEVE and MEDALIST results which were announced 2 weeks ago. CELG has suggested that luspatercept has $2-3B revenue potential in MDS and beta-thal. Stock has rallied +9%.
· 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.
· Eli Lilly (LLY): LLY's Taltz met its primary and major secondary endpoints in COAST-W phase 3 trial in Ankylosing Spondylitis (AS). Taltz demonstrated a statistically significant improvement in AS. Data from the trial is expected at scientific meetings and in peer-reviewed journals later this year. Based on the positive results, the company plans to submit for FDA approval later this year. LLY announces results from post-hoc analysis which demonstrated efficacy of galcanezumab in episodic and chronic migraine patients previously treated with BOTOX. The intended brand name (Emgality) has been conditionally accepted by the FDA, and a decision is expected by the end of September.
f). Upcoming Events/Catalysts:
- July-Aug: 2Q18 Earnings
- 7/11: BofA DC Day
- 7/20-25: American Society of Retina Specialists (ASRS) in Vancouver
- 7/24: LLY Update on Elanco spin/options
- 7/25: BIIB-Eisai present BAN2401 data at Alzheimer’s Association International Conference (AAIC) conference
- 7/27: International AIDS Society Conference (IAS) in Amsterdam(723-7/27)
g) Key Device & Bio-Pharm Trial Events:
· Alexion (ALXN): 2018: Expects Soliris phase III neuromyelitis optica (NMO) data in 2018
· 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:
