For a change, I'll be focused on big-cap companies at #JPM15

Monday, 5-January-2015

One week from today starts the annual J.P. Morgan Healthcare Conference, informally known as the Super Bowl of biotech.  It runs from January 12th through the 15th in San Francisco.  For investors, this means time is running out for you to finalize a schedule so that you can maximize your conference week.  I like to avoid the crowds and stay home, and so for me that means figuring out which company presentations to listen to over the webcast.  This is actually a difficult thing to do because as many as six companies present simultaneously (up to twelve if you include breakout rooms), and conflicts are unavoidable.  Even if you plan to listen to recordings later on, the sheer number of presentations available makes for a difficult juggling act for any investor.  Make sure you put some advance thought into it.

 

While thinking about this year’s schedule, I have already noticed a big change to my normal plan that is an interesting sign of the times:  this year I’ll be focusing on all of the large companies first.  As someone who primarily invests in mid caps and below, listening to the big cap presentations is not something I normally have time to do.  I have no edge as an investor when it comes to those companies, and so other than a couple I hold for the long-term, I do not obsess about every little detail.  Especially at such a busy conference like this one, I rarely have time for that.  However, this year is different because the issues surrounding these big companies are so important to the entire sector that you have to tune in no matter what your main focus might be.

 

Here are three key things I’ll be listening for when the majors present next week. 

 

Pricing-power

 

The elephant in the room this year is definitely the pricing-power issue.  As the entire investing world knows by now, AbbVie (NYSE: ABBV) signed a hepatitis C deal with Express Scripts (Nasdaq: ESRX) two weeks ago, freezing out Gilead Sciences (Nasdaq: GILD) from that particular formulary.  The big question now relates to whether this news should simply be viewed standard operating procedure for a duopoly at work, or a more ominous sign that industry pricing will undergo lasting change.  The best case I have read for the former argument is this article written by RA Capital’s Peter Kolchinsky, and Pharmagellan’s Frank David did a superb job arguing something more like the latter here.

 

Gilead and Express Scripts are scheduled to present on Tuesday, and AbbVie will follow on Wednesday.  From Express Scripts and AbbVie, investors will be looking for any hints about how large the discount was that sealed the deal.  We will also want to get a better sense about what other kinds of medicines might be impacted by this in the future.  Gilead’s commentary on what it means to lose such an important customer will be interesting, and we need to know what their strategy is to lock up other payers.  This is going to be the industry’s most important topic for all of 2015, if not forever, and so you definitely want to listen carefully to all three of these presentations.  The early details of what is going on will help you forecast how this will impact smaller companies further on down the road.

 

Combination studies

 

One of the most pervasive trends in cancer research over the last couple of years has been the increasing importance of combination studies, especially as it relates to immuno-oncology.  I’ll explain this in simple terms.  Checkpoint inhibitors, which many large pharmaceutical companies now have, represent amazing innovation that will significantly affect patient outcomes in many cancers going forward.  Because they are so good, assume that many other drugs will be used in combination with them.  We have already seen a lot of combo deals signed recently, and you can bet many more will be announced throughout 2015.  Therefore, if you own a smaller biotech that is developing a new cancer drug (especially in I-O), you definitely want to listen carefully to what these large companies are looking for when they do sign new agreements.

 

Frankly, this is one of those areas of development that is starting to get very crowded and complicated.  With so many combo deals having already been signed, it is hard as an investor to forecast which ones are likely to come out on top and become standard of care.  Therefore, you are going to want to listen closely to the experts describe how they think the dynamics of the market will play out.  Checkpoints by themselves could be vulnerable to the same pricing pressures as the above hepatitis C example, and so it is no surprise these companies are doing everything possible to differentiate their offerings.  We investors need to better understand how they plan to do that, because it will definitely affect many smaller companies.

 

M&A and partnering

 

Fueled mainly by the tax benefits of inversion deals, mergers and acquisitions was obviously a big trend in 2014.  However, those days seem to be over after the U.S. Department of the Treasury changed the rules on that.  We will want to pay close attention to what larger companies tell us the environment in 2015 looks like.  The news might be pretty good for us mid cap investors because everyone seems to be talking about bolt-on deals again now that those inversion rules have changed.  Personally, I’m excited to see what Shire (Nasdaq: SHPG) says because they are definitely on the hunt.  I recently filmed a short video with my thoughts about one company they could buy, and so I want to hear what Shire's latest thinking is these days.

 

Maybe we cannot entirely count out large deals in 2015 either.  Pay attention to companies who have already grabbed overseas tax domiciles, because they are the ones who are still able to pull off deals rather easily.  One presentation that will definitely be well attended is Valeant (NYSE: VRX) on Tuesday.  I have a hard time believing Michael Pearson is going to stay quiet on the deal front much longer after almost paying over $60 billion for Allergan.  I’m not sure we can count on the victor from that deal, Actavis (NYSE: ACT), being completely finished with M&A either.   They present on Tuesday as well, and I would watch what Brent Saunders has to say about his company’s plans.  Even if Actavis does not plan on doing any new deals for a while, they are still going to be a highly disruptive company.  I would recommend listening to his every word.

 

The partnership game should be interesting to watch too.  Pfizer (NYSE: PFE), for example, recently signed two big partnerships with Merck KGaA and Opko Health (NYSE: OPK), and will surely be looking to do more since AstraZeneca (NYSE: AZN) does not make much sense anymore.  Pretty much all of the major biopharma companies could similarly benefit from shoring up their pipeline.  That will bode well for our smaller holdings, but we need to hear specifics.  For example, I am a huge fan of technologies like CAR-T and gene therapy, and so I would be thrilled if it sounds like more investment will be headed that way.  However, personalized therapies have not been a specialty of larger companies, so I want to hear how they view their place in the world now that those technologies are moving to the forefront.

 

Conclusion

 

As you can see, key issues make large companies the ones to watch this year.  While I do not normally focus on them, this time it will be a priority.  Also, keep in mind there will be a record number of companies presenting this year, which means it is going to be that much more difficult to keep up.  Maybe it is best to take a top down approach, focus on the leaders, and see what that means for everyone else.

 

One last thing:  Matthew Herper at Forbes wrote an excellent article this weekend where he ranked 17 big-cap pharmas.  It makes for a great tune-up before the conference, especially if you do not normally follow those companies closely.  I highly recommend checking it out.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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