Healthcare Investor: 9/24/18
We are sending the healthcare update after a busy August. Based on some feedback, we made it a bit easier to read. Remember, the goal of the newsletter is to integrate what is happening in the industry with investment insights in healthcare. We send this out every 2-4 weeks. We tie ideas in the newsletter with text messages containing investment ideas. Feel free to engage in any way that works for you…including using the insights to build a diverse portfolio. Feedback is always welcome.
Highlights:
Healthcare stocksare +14% YTD vs. +10% S&P. After 2+ years of underperformance, Pharma rallied +18% so far in 3Q (vs. S&P +8%). Life Science Tools are +19% (continued momentum) and Services are +13% (improved sentiment on mergers).
Merger discounts(CI-ESRX & CVS-AET) have narrowed substantially but Takeda-Shire remains +9% (vs. +15% on 8/13)
Medtronic (MDT): Just met with senior management. Many interesting changes going on.
M&A for US Generics Sees New Low as NVS/Sandoz sells US generics business for ~4x LTM EBITDA.
Migraine:New class of drugs called CGRP are gaining FDA approval. TEVA’s Ajovy (fremanezumab) approved 9/14/18. This is second CGRP to market behind AMGN's Aimovig.
Immuno-oncology:KOL(Key opinion Leader) Docs noted adjuvant use of PD-1/PD-L1 could transform cancer ultimately achieving 3x the metastatic revenue opportunity (metastatic sized at $44B in 2024).
a) Key Areas of Focus in Healthcare:
HC policy consultants(both Marwood and Cowen) believe that while healthcare will remain in the headlines, large-scale changes that would disrupt the current policy ecosystem (i.e. major drug pricing or rebate overhauls, ACA repeal, Medicare-for-all, contagion risk from recent CA dialysis proposals) all seem highly unlikely in the near/intermediate-term. Strong NIH funding is expected to continue. Polls suggest the upcoming mid-term elections look to be pointing increasingly toward a Democratic win in the House.
Merger Discounts to Implied Take-Out Price: Merger spreads have substantially closed…
Aetna (AET): +3.4% spread to CVS take-out (+13% on 6/5)
Express Scripts (ESRX):+3% spread to CI take-out(vs. +8.4% on 8/13, +11.5% on 7/16; +21% on 6/5).
Shire (SHPG):+15% spread to Takeda take-out (+15% on 7/16;+19% on 6/5)
b) Cool Charts: Slides from CERN's recent investor day…interesting way to think about how demand and supply sides of healthcare are evolving.
Chart 1: HC Demand Strategies:Health Plans are shifting risk to providers…also vertical integration is another way to cut costs in the system
Chart 2: HC Supply Strategies:Health Providers respond by consolidating in pursuit of operational scale and to vertically own the continuum of care (acute to rehab to home care) as a way to navigate a shift to risk-based reimbursement from fee for service.
c) Summary of Ideas and Updates: (color rating key at end)
Top Healthcare Ideas: (*=Blue Rating)
Healthcare Services & Providers: *ABC, *CVS, ESRX
Medical Devices: ABT, *ZBH
Large Cap Pharma/Biotech: *AGN, *ALXN, *BMY, BIIB, *CELG, *GSK, *PFE, *SHPG
Deteriorating Fundamentals Ideas:
Healthcare Services & Providers: CAH (Yellow)
Medical Devices: None
Large Cap Pharma/Biotech: AMGN; Roche
Thesis Updates: None
d) Material Updates to Ideas & Industry:
CVS & ESRX Stock Strength: On 9/5, WSJ reported DOJ was nearing antitrust approvals for the CVS/AET and CI/ESRX mergers. On 9/18, CI/ESRX received formal DOJ approval, putting merger on track for a 4Q18 close. CVS appears on track to close before year-end as well.
MDT:Just met with MDT management. (1) There is a clear shift in how they communicate to the Street. They re-based long-term revenue growth to +4% and EPS to +8% with an acute focus on Free Cash Flow generation. They want low expectations and an ability to beat and raise going forward. (2) They are also highlighting near-term, intermediate-term, and long-term pipeline opportunities that gives them conviction on growth. (3). They are looking to hedge FX to drive better reported EPS growth. (4) They are on track for a 2020 launch of a surgical robot that can compete with Intuitive Surgical (ISRG). In sum, they want a premium valuation and are looking to put up strong key metrics to get there.
Drug Supply Chain: The Trump administration is looking to make "disruptive" changes to U.S. drug pricing to bring down costs for patients, HHS Secretary Alex Azar said. The government has taken aim at prescription list prices. JNJ said any changes to the rebate structure will be gradual. A separate industry call suggested eliminating rebates will not be easy to do with any material changes unlikely before 2021 allowing distributors time to re-contract to reflect the value they provide. Rebates are fully integrated in all three books of business (commercial, Medicare, and Medicaid). Eliminating in Medicaid would require an act of Congress (unlikely). Medicare changes likely limited to rule changes with implementation closer to 2021 at the earliest. Drug supply chain (ABC,CVS, CAH, MCK) strength likely from more comfort on this overhang.
Capsule Corp, an online pharmacy, is receiving $50 million in additional funding, from Conn. based Glade Brook Capital Partners and other existing investors, to expand its NYC model nationally in the next 12 to 18 months. They deliver Rx same-day to the door, people just pay the co-pay and can text, call, email, or chat questions to a pharmacist. www.capsulecares.com We think they have a long way to go and the model may be scalable in NYC but not the rest of the US.
Both Siemens Healthineers & Philipscited optimism on hospital CapEx/imaging machine order growth (MRI, CT, and other scanning equipment). US hospital growth has improved as the year has progressed and growth is in the +3-4% range vs. prior expectations for LSD growth. US hospitals are shifting spending from EMR/HCIT to replacing medical equipment. HC CapEx/Tools (DHR,TMO,ILMN,PKI) stocks are at multi-year highs…any deviation to end-market growth could re-base this group.
M&A for US Generics Sees New Low:Aurobindo's acquisition of a NVS/Sandoz portfolio (early Sept) of generics for ~4x LTM EBITDA raised questions from investors around the implications for generic valuations.
e) Recent Pipeline Readouts & Updates:
Migraine:TEVA’s Ajovy (fremanezumab, a CGRP mechanism for migraine) approved 9/14/18. This is second CGRP to market behind AMGN's Aimovig and both are priced similarly. TEVA's Ajovy is a pre-filled syringe vs. AMGN's Aimovig is an auto-injector. LLY's galcanezumab FDA action is expected by end of Sept. Migraine could be a $5B market over the next 5-7 years driven by CGRP adoption. Infusion players include AMGN, TEVA, LLY and oral include AGN and a small player.
Immuno-oncology:Adjuvant use of PD-1/PD-L1 could transform cancer ultimately achieving 3x the metastatic revenue opportunity (metastatic sized at 44B in 2024). The number of neoadjuvant/adjuvant trials increased by 32% in the past year to 283 with 40 in Phase III in 11 tumor types. 34 report by 2023 with 6 by the end of 2019. BMY has the most followed by MRK AZN RHHBY and PFE.
BMY:Announced that the FDA granted accelerated approval for the use of Opdivo in patients with SCLC(small cell lung cancer) who have previously received at least two lines of therapy. The approval was based on the results of the Phase I/II CheckMate-032 study, where patients demonstrated a 12% objective response rate and median duration of 17.0 months. This marks the first novel therapy approved in SCLC patients in nearly 20 years but Opdivo has already been included in the guidelines and a limited number of patients with SCLC reach third-line therapy. Also, Roche announced in June that the IMpower133 trial evaluating Tecentriq(competitor to Opdivo) with chemotherapy in newly diagnosed SCLC patients demonstrated a significant benefit in overall survival compared with chemotherapy alone. While some physicians may consider re-treating a patient with a PD-1 antibody following disease progression on a PD-L1 antibody plus chemotherapy, we believe this will be limited. Opdivo is running an earlier stage trial in SCLC to compete with Roche.
PFE:Reported positive Phase 3 data in tafamidis and expect US approval and launch in 2019. There are currently no drug treatments available for this rare disease. PFE sees this as a +$1B opportunity. Data showed a 30% reduction in the risk of mortality (stat sig) and a 32% reduction in the rate of cardiovascular-related hospitalizations in people with transthyretin amyloid cardiomyopathy vs. placebo. Recall transthyretin amyloid cardiomyopathy can be acquired through the aggregation of wild-type transthyretin protein (ATTRwt) or it can be an inherited trait, caused by mutations in the transthyretin gene TTR (ATTRm). The disease is infrequently diagnosed but new non-invasive testing could improve this.
AMGN/NVS:In a federal trial that began on Tuesday, 9/11, Novartis' Sandoz segment is challenging five patents related to AMGN's Enbrel ($5B in sales/23% of total). If Novartis is successful, its biosimilar Erelzi could enter the U.S. market and erode sales of Amgen’s biggest drug.
GSK: GSK recently announced their new doublet in HIV met the Phase 3 endpoint. This means growth in the HIV/ViiV segment should continue in the +9-10% range with potential for more given the disruptive nature of the doublet relative to current triple therapies. The doublet provides equal benefits but lower long-term side effects.
f). Upcoming Events/Catalysts:
9/21-25: TCT Conf in San Diego, big conf for Interventional cardiologists
9/24: GS Med Tech Chicago Tour (I'm attending part of it at Northwestern Hospital)
9/26-29: NASS Conf: Spine doctor med conf
9/23: MRK PDUFA U.S. approval for Keytruda + chemo in 1L non-squamous NSCLC (KN-189)
10/1: CVS announces formulary exclusions
10/9-10/11:: Cowen Therapeutics & Devices Conf (NYC, I am attending)
3Q18/4Q18: CVS-AET merger expected to close
g) Key Device & Bio-Pharm Trial Events:
Alexion (ALXN):2H18: Expects Soliris phase III neuromyelitis optica (NMO) data in 2018
Abbvie (ABBV):2H18: Full P3 data of Orilissa in uterine fibroids; EU approvals and launches of Humira (ABBV) biosimilar
Amgen (AMGN): Potential biosimilar launches on Neulasta (AMGN product)
AstraZeneca (AZN):2H18: Cardiovascular outcome trial for SGLT2 Forxiga DECLARE study; 2H18: Imfinzi/Treme in 1L lung cancer (NEPTUNE)
Bristol-Myers Squibb(BMY):2H18: CM-331 P3 Opdivo data in 2L SCLC; Phase 3 data in the following cancers: HCC, GBM, MM, NSCLC
Celgene (CELG):2H18: JCAR017 (CAR-T cancer therapy) additional pivotal data updates
Lilly (LLY):2H18: Trulicity REWIND study (for Cardiovascular benefit); 2H18: NVO P3 oral semeglutide data; P3 Cyramza data (RELAY) for 1L lung cancer
Merck (MRK):10/30: MRK PDUFA U.S. approval for Keytruda+ chemo in 1L metastatic squamous cell lung carcinoma; 2H18: Lynparza P3 data in pancreatic cancer
Pfizer (PFE):2H18: tanezumab P3 Pain data
Roche:2H18: P3 data in RCC IO/Avastin combo for all comers and PDL1>50%; P3 data in Colorectal from COTEZO trial; P3 data in Melanoma from TRILOGY trial; Tecentriq + chemo +/- steroids data in NSCLC (5 studies), RCC, SCLC, and TNBC (in 2018)
Healthcare Color 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.