The Bull Case for SNY’s Diabetes Franchise – Update

Written January 23rd, 2015 by

Consensus expectations for SNY’s basal insulins (Lantus/Toujeo) appear too low. Expectations fell 28% after SNY warned last October that US pricing had weakened, and have fallen to the point that consensus now expects 2017 sales to be lower than 2014 sales

This seemingly ignores the facts that in the US (66% of global Lantus sales) unit demand for basal insulins is growing at 10%, Lantus’ unit share of the basal insulin market is growing; and, both SNY and its key competitor (Levemir/NVO) increased list prices of their products by 11.9% in the month following the warning

In short, consensus expectations for Lantus (and the follow on product Toujeo) have failed to adjust for recent volume, share, and pricing trends, all of which point to substantially higher than consensus sales

As an entirely separate matter, we believe SNY’s pre-phase 3 pipeline is undervalued – so much so that SNY’s share price would have to increase by roughly 45% in order to more accurately reflect the apparent amount of innovation in the pre-phase 3 pipeline. To be clear, this is on an all-else-equal basis; i.e. we would argue SNY is roughly 45% undervalued even if consensus figures for Lantus and Toujeo were correct, though we don’t believe they are

Taken together, we see two powerful – and independent – reasons to believe SNY is substantially undervalued

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

The Outlook for Brand Drug Pricing Part 1: The Traditional Large-Cap Pharmaco’s

Written January 20th, 2015 by

US net pricing gains explain more than 100 percent of US revenue growth for the large-caps as a whole; making net price growth crucial not only to future growth but also to dividends, a signal feature of valuations

Net pricing gains are at risk, particularly from rising co-pays, which manufacturers subsidize with co-pay cards that reduce patients’ out-of-pocket costs at the pharmacy counter. As co-pays rise so do the subsidies offered by manufacturers’ co-pay cards, in a self-reinforcing cycle; however the co-pay subsidies reduce net price

To bring the essential moving parts into view, we provide data on list price growth, rebate / discount growth, and resulting net price growth for each company, and also for each company’s key brands

Of the large-caps, Roche is in the strongest position with regards to US pricing. Roche’s US revenues depend very little on US net pricing gains, and the company arguably could raise its net US prices more rapidly than it is doing

AZN, GSK, LLY, and MRK are in the weakest positions with regards to US pricing. GSK is likely to see further US net price erosion for Advair, which accounts for about 32 percent of GSK’s US Rx revenue. This spills over to AZN, whose Advair competitor Symbicort will likely be caught up in the broader category’s emerging price competition. Of LLY’s key brands only Cialis has remaining US net pricing growth; however Cialis loses patent protection in just 2 years. MRK’s net pricing trend is negative, MRK’s average discounts exceed the peer average, and these discounts are growing more rapidly than the peer average

PFE is a unique middle case – it has a number of brands that offer continued US net pricing gains; however the company is pushing net price growth faster than the peer average, and is more reliant on these net pricing gains than other companies. There are significant risks that PFE’s net pricing gains cannot continue to exceed the peer average pace

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



Flu Effects on 4Q14 Earnings

Written January 9th, 2015 by

The 2014 – ’15 flu season is slightly worse than 2013 – ’14 overall; we estimate flu-related hospital spending will be up roughly 30%

Notably, most of the additional hospitalizations are occurring among the elderly (65+), in fact hospitalization rates for persons aged 18-64 are actually down versus last season. This implies that any negative earnings effects should be isolated to insurers with significant Medicare exposure

However despite the concentration of increased flu demand among the elderly; absolute growth in total Medicare claims should be modest. We estimate flu increased hospital spending for Medicare beneficiaries by roughly $972M in 4Q14 which, on the estimated ‘base’ spending of $63B in that period, represents an increase of only 1.5%

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

R&D:Sales Ratios Will Fall, Meaning AZN & LLY are Cheap, Research Tools & Services are Expensive

Written January 6th, 2015 by

Returns to R&D spending are below costs of capital and deteriorating further; despite this the average large pharmaceutical company has increased R&D:sales ratios over the last decade. This implies that managements have faced little if any pressure to return cash to shareholders rather than funding non-productive R&D. We believe this is changing

With costs of debt very low and R&D (and SG&A) to sales ratios very high, it is both theoretically and practically feasible for activists to fund a company’s acquisition simply by correcting the target company’s inefficiencies. For example lowering R&D and SG&A ratios to feasible levels (8% and 29%, respectively) would free cash flows sufficient to service debt equal to 1.8x the current market value of AZN, and 1.2x the current market value of LLY

This points to two simple conclusions:

On the bright side, AZN and LLY are undervalued – managements either capture efficiencies and return more cash to shareholders on their own initiative, or risk having to do so under activist pressure. Either way, share prices go up

On the less cheerful side, average R&D:sales ratios are likely to fall which, given weak (+/- 4%) expectations for longer-term pharmaceuticals sales growth points to outright declines in R&D spending. This is negative for the broader Research Tools & Services sector, where consensus calls for longer-term revenue growth of 11%

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

SSR Health New Product Approval Portfolios & Supporting Data Update

Written December 8th, 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’ portfolio 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 (64% v. 34%) at a lower standard deviation annual of returns (11% v. 15%) 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 (86% and 100% v. 34%), though at higher s.d. of returns (23% and 43% v. 15%). Over the last twelve months, the 1%, 5%, and 20% pre-PDUFA portfolios have returned 72%, 115%, and 184%, respectively, versus 21% for the innovator index and 51% for the BTK, while also significantly 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)

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

The Bull Case for SNY’s Diabetes Franchise

Written December 5th, 2014 by

2017 consensus for SNY’s US basal insulins fell from $9.9B to $7.5B after the company warned 2015 sales growth would be flat, citing price competition. We believe estimates have fallen too far, and imply an unstable pricing environment with significant downside risks. In contrast, we believe current levels of US net pricing are at the very least stable, and may improve

Key facts: there are only two entrants in the basal insulin market; the market laggard (NVO’s Levemir) is an imperfect substitute for the market leader (SNY’s Lantus); SNY’s pending Lantus replacement (Toujeo, 1Q15) makes Levemir an even less perfect substitute; the entrants cooperate on price rather than competing on price; absolute net pricing levels are relatively low (about $60 / month); and, total basal insulin sales are only about 3% of total US drug spending

Because average Rx prices and total category spending are relatively modest, and because Levemir is an imperfect substitute for Lantus (and ultimately Toujeo), it is extremely unlikely that a large number of US payors will attempt to shift a large number of US patients from Lantus (or Toujeo) to Levemir. Having no reasonable prospect of large unit share gains NVO has no motive to price Levemir below Lantus

Instead, NVO has cooperated (and in all likelihood will continue to cooperate) on price. All of the US list pricing actions on Lantus and Levemir have fallen within 25 days of each other since at least 2009; on average the companies have raised list prices within 12 days of one another. The most recent price increases occurred in early November; both companies raised US list prices by 11.9%

SNY’s problem isn’t NVO – NVO couldn’t possibly be more cooperative, and they’ve done nothing to undercut pricing recently. SNY’s problem is payor frustration with the rate of price increase in the category. Being the category leader, SNY’s Lantus is the natural target of that frustration

Lantus lost less than 2 percent new unit share to Levemir in any given year from 2010 to 2013; however as price increases accelerated to more than 40% in 2014 (from more than 20% in 2013) a small but meaningful group of payors pushed back, and Lantus lost more than 4 percent new unit share to Levemir in the first 3 quarters

SNY increased its Lantus rebates in response, so that Lantus’s net price is now about 7% greater than Levemir’s as opposed to the 15% premium Lantus carried in 2013. It was SNY who blinked, not NVO

NVO almost certainly will not lower Levemir’s price (list or net), and SNY almost certainly will not move to a price (list or net) below Levemir’s. Payors cannot mount a wholesale shift of patients from Lantus to Levemir, because Levemir isn’t the right drug for the majority of patients, and the resulting non-Rx medical costs from a wholesale Lantus to Levemir shift would more than outweigh any savings from lower drug prices. The worst case scenario is that Lantus’s net price (currently $63.54 / month) falls 7% to the Levemir level ($59.12), and that list price growth in the category simply ends

The more likely scenario is that Lantus’s net pricing falls to the Levemir level, but that category list price growth falls at most to the industry rate (+/-13%) rather than ending altogether. Toujeo should at least stabilize SNY’s basal insulin share, and in all likelihood should regain modest share from Levemir

All in, SNY’s US basal insulin sales in 2015 could be +/-8% lower than 2014 (assuming zero list price growth), or more likely at least roughly flat (assuming some degree of list price growth is preserved). After 2015, stable market share and net price growth at the industry rate imply high single digit to low double digit sales growth, leading to 2017 sales potential of roughly $9B – $1.5B above current consensus

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 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

© 2014 - SSR LLC
Wordpress Themes
Scroll to Top