Relative Price & Value of pre-Phase III Pipelines for the 23 Largest Drug & Biotech Companies – Updated View

Written November 20th, 2014 by

We use patent data to estimate the amount and quality of innovation in companies’ pre-phase III (aka ‘hidden’ pipelines); we then determine whether companies’ share prices accurately reflect what’s in these hidden pipelines.  Since inception (November 2012), companies that screen as >= 20% undervalued have outperformed their peers by 1.4x (cap wtd) to 1.6x (equally wtd)

Because of large misvaluations in hidden pipelines, shares of VRTX, BMY, SNY, and GSK all appear at least 20 percent undervalued. Conversely shares of ALXN, BIIB, CELG, GILD, NVO, REGN, and SHPG all appear at least 20 percent overvalued

For more information on our pipeline valuation methods, and for related R&D productivity metrics covering the 23 largest publicly-traded companies (by R&D spending) please visit

For our full research notes, please visit our published research site

Hold-Out States Will Expand Medicaid – Just Ask History

Written November 17th, 2014 by

The original Medicaid program was passed in ’65, going into effect in ’66 – and only 26 states joined the program in that first year. By 1970 all but Alaska and Arizona had joined; Alaska held out until ’72, Arizona until ‘82

As with any large social program, Medicaid was born into political controversy. Yet as the program’s date of passage fell into the past, the framing of the debate shifted – from national politics to state politics and economics. Ultimately allstates chose not only to participate in Medicaid, but to expand their programs well beyond the federal minimums – at an average marginal cost of $0.43 per $1.00 of Medicaid spend

As the current Administration winds down, the Medicaid expansion debate again moves from national politics to state political economics. States can expand their programs at a marginal cost of $0.10 per $1.00 of Medicaid spend – good economics for even the most reluctant Keynesian. On average, states can expand to eligibility to 100FPL by raising their total state budgets by only 0.2%, or to 138FPL by raising total state budgets by 0.4%

We expect most ‘non-expansion’ states to expand to at least 100FPL in or around 2016; this raises enrollment by 6%, and total Medicaid spending by 4%. Full expansion to 138FPL would raise enrollment by 11%, and total Medicaid spending by 7%

Medicaid HMOs (e.g. CNC, MOH, WCG) are the primary beneficiaries of further expansion; of these CNC is by far the most exposed to the non-expansion states, and would benefit most from growth in these states’ programs

Hospitals (e.g. CYH, HCA, LPNT, UHS, THC) also are beneficiaries of further Medicaid expansion, mainly because of reduced costs for uncompensated care; of these HCA has the greatest share of its beds (86%) in states that have not yet expanded, and presumably would benefit most

For our full research notes, please visit our published research site

SCOTUS Round II: Does King Really Matter?

Written November 11th, 2014 by

The Supreme Court of the United States (SCOTUS) will hear arguments in King v. Burwell, in February or March of 2015, with a ruling likely in June of 2015. A decision to uphold King would mean persons buying health insurance on federally (rather than state) managed health insurance exchanges (HIEs) are ineligible for subsidies

If King is upheld, governors in affected states (those with federally managed HIEs) can keep federal subsidies flowing on their HIEs by simply taking over management of the HIE. We believe most are likely to do so

In the 27 states with federally managed HIEs, we count roughly 11.8M persons who are likely to favor state control of the HIEs in order to keep $12.2B in subsidies flowing; included in this number are 3.8M persons currently receiving subsidies (which average +/- $3,216 / year), 2M persons who are likely to need federal subsidies in any given year because of job loss, and 6.5M healthcare employees. In these same states we count roughly 6.8M persons who oppose state control of the HIEs in order to shield themselves from penalties for being uninsured, which average about $590 per person per year, and total about $4.0B in aggregate. On net, voters in favor arguably outnumber those opposing, and voters in favor arguably are more motivated (the dollar impact of subsidies gained is far larger than the dollar impact of penalties avoided) (see Appendix 1 for details by state)


Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. VRTX, BMY, SNY): Biopharma companies with pending major product approvals (e.g. TSRO, ALKS, HLUY, EBS, BMY, BVRX, CBST, ACRX, BMRN, PCYC); ABBV and ENTA on sales prospects in Hep C; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: Biopharma companies with overvalued pipelines (e.g. GILD, ALXN, SHPG, REGN, CELG, NVO, BIIB); PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX, CTRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WAG, CVS, RAD); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE, VOLC)


For our full research notes, please visit our published research site

What Healthcare Stocks’ Share Prices Imply about Future Growth, and How this Squares (or not) with Fundamentals

Written November 6th, 2014 by

Hospitals are benefiting from rising patient flows and reduced costs for uncompensated care; however as insured patients move to cheaper forms of coverage they owe larger percentages of hospital bills, which they often don’t pay. Thus Hospitals’ net pricing is likely to come under further pressure as we lap the benefit of reducing the ranks of uninsured. Suppliers of Consumables to Hospitals enjoy all of the benefits of rising patient flows, but with more predictable pricing … yet many have share prices that imply slower growth than Hospitals (e.g. BCR, TFX, OMI; see pages 6-8)

Hospital employment fell at the beginning of 2014, and Hospital new construction spending is in outright decline. This implies Hospital administrators may have anticipated more demand growth from the Affordable Care Act (ACA) than has materialized. This further implies weak demand for companies that supply capacity-expanding (e.g. hospital beds) and capabilities-expanding (e.g. advanced imaging, robotic surgery) capital equipment to Hospitals. Inventories are rising at several of these firms, particularly EKTAY, HAE, ISRG, and VOLC (see pages 10-12)

Medicaid-predominant HMOs are gaining share in a rapidly growing (as hold-out states expand Medicaid) market, and average contract values stand to increase as higher-spend dual eligibles eventually are enrolled. In sharp contrast, Commercial-predominant HMOs stand to lose share (to local carriers) in a more gradually expanding market, and average contract values are stalling as enrollees choose cheaper forms of insurance. Nevertheless valuations fail to capture the difference in growth potential; we believe implied rates of growth for select Medicaid-predominant HMOs (particularly CNC, MOH, WCG) are far too low (see pages 13-14)

Demand for Dental products and services appears to be more elastic than demand for other healthcare products and services – meaning Dental demand should grow more quickly as employment grows and coverage expands. Despite this, Dental names (especially XRAY, PDCO) imply slower growth than the broader Healthcare universe (see pages 14-16)

The Dialysis providers (DVA, FME) are riding a more powerful demographic wave (obesity = type 2 diabetes = renal insufficiency) than the broader Healthcare universe, and stand to benefit from a sustainable expansion of gross margin once generic forms of erythropoiesis stimulating agents (ESA’s) are available (+/- 2016), yet share prices imply slower growth than for broader Healthcare (see pages 16-17)

For our full research notes, please visit our published research site

SSR Health New Product Approval Portfolios & Supporting Data Update

Written October 20th, 2014 by

Drug, biotech, and research-based spec pharma stocks tend to outperform their peers in the year or so before and after regulatory actions (‘PDUFA’ dates) on major new products, with a large portion of total risks being concentrated in the days immediately preceding and following the PDUFA date

Since November of 2011 we’ve run model portfolios consisting solely of names with pending (i.e. ‘pre-PDUFA’) or recent (i.e. ‘post-PDUFA) major-product regulatory actions, respectively. Within each broader ‘pre-‘ and ‘post-PDUFA’ portfolios are three sub-portfolios that differ only in terms of how large the new product is as a percentage of the company’s total sales forecast. E.g. the ‘1% pre-PDUFA’ portfolio consists of all names with pending regulatory decisions on products that account for at least 1% of the company’s total sales forecast, and so on for the ‘5%’ and ‘20%’ pre- and post-PDUFA portfolios. To moderate risks, all portfolios follow rules to limit long positions in the days immediately before and after regulatory actions

Since inception the 1% pre-PDUFA portfolio has produced greater annualized returns (52% v. 31%) at a lower standard deviation annual of returns (11% v. 14%) than an ‘innovator index’ of nearly the entire universe of biopharmaceutical stocks. The 5% and 20% pre-PDUFA portfolios have outperformed by even greater margins as compared to the innovator index (68% and 79% v. 31%), though at higher s.d. of returns (25% and 43% v. 14%). Over the last twelve months, the 1%, 5%, and 20% pre-PDUFA portfolios have returned 43%, 66%, and 116%, respectively, versus 17% for the innovator index and 36% for the BTK, while also reducing relative risk

We expect US real pricing power for pharmaceuticals to fade, which will increase the importance of new product flow to relative performance. Thus screening for names with attractively priced new product flow is an appropriate first step to stock selection across the drug, biotech, and spec pharma sub-sectors. We offer two related tools, the first being these portfolios of names with major pending or recent regulatory actions (published monthly); the second being our Hidden Pipeline series of reports that identify undervalued phase 2 and earlier pipelines (published quarterly)

Please note: regularly included in this series of reports are detailed tables of all (major or not) pending new drug applications (NDAs) and biologics license applications (BLAs) for all US-listed drug, biotech, and research-based spec pharma companies; and, detailed tables of all phase 3 products under active development by these companies

For our full research notes, please visit our published research site

WAG/RAD: Pressure on generic dispensing margins likely to be much more permanent than guidance implies

Written October 14th, 2014 by

WAG & RAD both recently lowered guidance; both blame falling generic dispensing margins. In each case the companies point to pressures on both sides of the margin equation – rising generic acquisition costs, paired with lower-than-expected reimbursement

Unravelling the relative importance of these two effects is strategically crucial; rising generic acquisition costs are relatively transient; rising reimbursement pressures are more likely to be permanent

Evidence indicates generic acquisition costs played little if any role in reducing companies’ generic margin expectations; this implies falling reimbursement pressures played the major role, and that lower generic dispensing margins are here to stay

The companies make 3 arguments regarding the generic acquisition cost trend: 1) acquisition costs grew at a surprising rate on ‘existing’ products; 2) acquisition costs on newly launched generics fell more slowly than normal; and 3) newly launched generics are being made by fewer manufacturers than expected

None of these arguments are supported by evidence. On a sales-weighted basis, ‘existing’ product generic acquisition costs indeed experienced major hikes through February 2014, but they remained stable thereafter through the months when the companies issued/confirmed higher guidance (and subsequently lowered it). Also on a sales-weighted basis, acquisition costs of newly launched products fell faster more recently (Nov. 2013 – July 2014) than they did last year. Finally, the number of manufacturers for new generics has been no different than should have been expected given the dollar size of the parent brands, the presence or absence of an OTC version of the parent molecule, and the complexities of manufacturing any given new generic

By simple process of elimination this argues that reimbursement pressures are likely to be the major cause of falling generic dispensing margins at retail. The companies acknowledge the trend to narrow networks has played some role in reduced reimbursement; we would argue that narrowing of networks appears to have played a major role, will continue for some time, and will result in steady additional pressure on generic margins. As context, consider that REAL retail pharmacy dispensing margins have grown faster than real pharmaceutical prices since at least 2001, despite the fact that there are no fewer outlets now than in 2001

Unmentioned as a driver of lowered guidance is the shift toward reimbursing pharmacies on the basis of NADAC (which is likely to result in lower generic margins than reimbursements based on AWP). NADAC became available to all US retail pharmacies in April of this year, meaning 2014 has been the first negotiating season (for 2015 benefits) in which payors could reasonably be expected to ask retailers for NADAC-based contracts

For our full research notes, please visit our published research site

Healthcare & the Midterm Elections: Everything You Need to Know

Written October 6th, 2014 by

Republicans almost certainly will maintain control of the House, and have roughly 60% odds of gaining Senate control – 70% if independent Maine Senator Angus King agrees to caucus with Republicans. Republican leadership of the Senate would likely bring the medical device tax repeal measure to the floor; on-record non-binding votes indicate the measure would pass – thus a Republican Senate obviously is good for Medical Devices

A Republican Senate also raises the odds of a repeal vote on the Independent Payment Advisory Board, or ‘IPAB’. An IPAB repeal is further enabled by the fact that latest projections indicate no budget savings from IPAB before 2024 – which means Congress can for the first time repeal IPAB without having to find other sources of savings (so called ‘pay-fors’) the IPAB would have delivered. If IPAB is repealed Medical Devices and Biotech dodge a bullet – since IPAB almost certainly would give CMS permanent pricing authority over branded drugs and devices used by Medicare beneficiaries under Parts A and B

Eight of the states that have not yet expanded Medicaid are likely to lean at least a little bit more away from ‘R’ and toward ‘D’ following the midterm – which raises the odds these states choose to participate in the Medicaid expansion following the election. Hospitals are the obvious beneficiaries, particularly HCA and THC, who have large percentages of their total beds in these states

Away from the election, but still fair game in the context of ‘R’ vs. ‘D’ battles over healthcare, legal challenges to the federal government’s ability to give health insurance subsidies to persons buying coverage on federally managed exchanges (i.e. in states that did not build their own exchange) appear destined for the Supreme Court. Contrary to the conventional wisdom if plaintiffs win, instead of beneficiaries on federally managed exchanges being denied subsidies, we see the states in question being forced by their own citizens to operate exchanges. Consider that in these states, the number of persons currently receiving federal subsidies to buy health insurance outnumber teachers 2:1, and the average subsidy is $265/month

For our full research notes, please visit our published research site

GILD’s Generic Co-opetition: Little Impact on Global HCV Estimates, or to ABBV / ENTA Bull Case

Written September 22nd, 2014 by

GILD’s decision to authorize HCV generics in 91 lower income countries arguably reflects multiple considerations, including that generics were likely to soon appear in these countries with or without GILD’s authorization

By granting generic licenses to a core group of cooperating manufacturers, GILD increases the odds that these manufacturers will stay within the licensed countries; i.e. at the very least the expansion of HCV generics into countries wealthier than these 91 is delayed

And, by giving cooperating generic manufacturers a head start, cooperating manufacturers’ generics are more likely to crowd out demand which might have gone to ‘non-cooperating’ manufacturers, meaning GILD has at least some influence over a larger percentage of generic supply for a longer period of time

Of the 91 countries in which GILD has authorized generic versions of its HCV products, only four (India, Egypt, Pakistan, Vietnam) were included in our global HCV forecast. These countries accounted for approximately 9 percent of our global HCV estimate, and we had already earmarked two of these (India and Pakistan) as markets that were relatively likely to either go generic or be muted by ongoing conflicts

On net, we see GILD’s decision to authorize generics as a rational strategy that does little to alter our overall expectations regarding branded sales of current-generation HCV agents

We continue to believe that global expectations for HCV brand sales are reasonable, but that consensus gives far too little credit to ABBV’s regimens. The ABBV (and by extension, ENTA) regimens are as effective as the GILD regimens, with only modest differences in convenience and/or tolerability. We expect ABBV to capture more than 20 percent of global demand for current generation HCV treatments

For our full research notes, please visit our published research site

ABBV (and ENTA): The Corvette(s) to GILD’s Ferrari

Written September 2nd, 2014 by

We believe consensus incorrectly views GILD’s pending hepatitis C (HCV) regimen as having consistently greater efficacy than ABBV’s pending regimen; in this note we compare pivotal trial results for the two regimens side by side, and show that the ABBV alternative offers comparable efficacy

The GILD regimen is of 8 (rather than 12) week duration in some but not all type 1 patients; the ABBV regimen is of 12 week duration in all patients. Patients are required to use ribavirin (RBV) more often on ABBV than on GILD regimens. Both regimens are highly tolerable; there were no withdrawals for adverse events (AE’s) in GILD’s three main trials; across ABBV’s five main trials, two saw zero AE related withdrawals, one trial saw a 0.5% rate, one a 1.0% rate, and one a 1.9% rate

The GILD regimen is one pill once daily; the ABBV regimen is no more than three pills twice daily

On net, the ABBV regimen offers the same efficacy, at the cost of greater treatment duration and/or the addition of RBV-associated tolerability issues. Despite this narrow relative disadvantage vs. GILD, in an absolute sense the ABBV regimen is both sufficiently brief and highly tolerable – making it a viable alternative, especially for cost-sensitive payors

In this note we detail the efficacy and tolerability gap between PegIntron and Pegasys, the two predominant pegylated interferons (IFNs) that have been the mainstay of HCV therapy for more than a decade. We show that despite being substantially less effective and less tolerable than Pegasys, that PegIntron has captured 34% of global pegylated IFN sales to date

The ABBV HCV regimens are far more closely matched to the GILD HCV regimens than PegIntron was to Pegasys; accordingly barring the effect of additional competitive entrants, we would expect the ABBV HCV regimens to capture global share on par with that captured by PegIntron (i.e. more than 30%)

Allowing for the effect of competitive entrants (the first with at least comparable efficacy to ABBV comes from BMY in 2016, the second with potentially comparable efficacy from MRK in 2017), we’re confident ABBV can capture at least 20% of global sales. Current consensus appears to credit ABBV with less than 10% share of global sales

One component (ABT-450) of the ABBV regimen is licensed from ENTA; we believe cumulative royalties to ENTA should range between $900M and $3.5B. ENTA’s current enterprise value is roughly $665M

For our full research notes, please visit our published research site

Relative Price & Value of pre-Phase III Pipelines for the 23 Largest Drug & Biotech Companies – Updated View

Written August 26th, 2014 by

Using patent data, we estimate the relative ‘true economic’ value of companies’ pre-phase III (aka ‘hidden’ pipelines), and then compare these estimates to the apparent market capitalization of these same pipelines. Since inception (November of 2012), our portfolios of stocks whose hidden pipeline misvaluations imply ≥20% relative share price gains has appreciated at 1.5x the rate of a comparator portfolio containing all 22 companies analyzed (equal-weighted 1.5x; cap-weighted 1.5x)

Capital markets misvalue pre-phase III (i.e. ‘hidden’) pipelines for an obvious reason: they’re hidden, at least to conventional methods of valuation. Careful analysis of patent data gives us an opportunity to see what’s hidden, and to determine whether it’s fairly valued

On average, roughly 35 percent of the largest drug and biotech (by market cap) companies’ share prices are linked to these companies’ ‘hidden pipelines’, i.e. to projects in phase II and earlier stages of development

The percent of share price explained by a company’s hidden pipeline ranges from 5 to 69 percent. The apparent economic value of the innovation in these companies’ hidden pipelines spans a similarly broad range, but in many cases the capitalization of a company’s pipeline will be low versus peers even though its pipeline contains more innovation than peers, or vice versa

Because of large misvaluations in hidden pipelines, shares of VRTX, BMY, and SNY all appear at least 20 percent undervalued. Conversely shares of ALXN, BIIB, CELG, GILD, NVO, and REGN all appear at least 20 percent overvalued (SHPG also appears >20 percent overvalued, but will be dropped from the peer group going forward, as it is rolled into ABBV)

For more information on this, and related R&D productivity metrics covering the 22 largest publicly-traded companies (by R&D spending) please visit

For our full research notes, please visit our published research site

© 2014 - SSR LLC
Wordpress Themes
Scroll to Top