Global Health Care Innovations Strategy
Total Page：16
File Type：pdf, Size：1020Kb
PORTFOLIO MANAGER COMMENTARY July 2016 Global Health Care Innovations Strategy Key Takeaways We had expected the DOJ to permit at least one of the managed care mergers and believe there is still a chance that Aetna and Humana will successfully defend their deal in court. Biogen and Ionis Pharmaceuticals announced positive Phase III Evan Bauman trial results for its spinal muscular atrophy treatment, which we Managing Director, Portfolio Manager believe has blockbuster sales potential. Market Overview The overall markets had a healthier month in July, and laggard groups, like health care and especially biotechnology, snapped back. The MSCI World Healthcare Index (Net) returned 4.5%, ahead of the broader S&P 500 at 3.7%. Both biotechnology and Marshall Gordon contract research organizations generated double-digit returns and biotechnology stocks across all market capitalizations participated Director, Portfolio Manager in the rally. Specialty pharmaceutical and generics companies also offered returns above the sector average. In contrast, managed care stocks finished the quarter down due to government actions to halt mergers in the sector. BioMarin Pharmaceutical provided a positive update on its Hemophilia A gene therapy program. The gene therapy fully corrected the Factor VIII deficiency in six of seven patients. In Nicholas Wu addition, six of seven patients did not have bleeding events (vs. Director, Portfolio Manager baseline of 20 per year) after the therapy kicked in. Finally, the therapy was safe to the liver without any reduction in Factor VIII effect from mild side effects. Although the number of patients is small and we still need to see long-term Managed care industry fundamentals persistence data, we believe the efficacy of the remain strong, including robust growth BioMarin program is meaningfully de-risked. for government programs and low Biogen and Ionis Pharmaceuticals announced utilization in core commercial and that its Phase III trial of nusinersen in spinal government businesses. muscular atrophy was positive at an interim analysis and demonstrated a significant improvement in achievement of motor milestones. We believe nusinersen has blockbuster sales potential and will be a meaningful growth contributor for Biogen and Ionis. The most notable event in July with respect to mergers & acquisitions was the Department of Justice (DOJ) suing to prevent the combinations of Aetna with Humana and Anthem with Cigna, based on antitrust concerns. We had expected the DOJ to permit at least one, if not both, of these deals and we believe there is still a chance that Aetna and Humana will successfully defend their deal in court. We do not, however, see this as a sign that the U.S. government will block all significant deals, and we point to the Federal Trade Commission allowing Teva to purchase Allergan’s generic business as a recent example. CLEARBRIDGE GLOBAL HEALTH CARE INNOVATIONS STRATEGY A number of smaller scale acquisitions were announced in continued volatility to incrementally increase exposure to July among product-oriented companies. Galenica offered our core positions and initiate positions in high-quality, to purchase Relypsa to sell their potassium lowering small- and mid-cap biotechnology innovators. agent for $1.2 billion and Nichi-iko Pharmaceutical agreed Large cap pharmaceutical stocks face a number of to acquire U.S. specialty generic manufacturer Sagent cross currents. Like biotechnology, innovation among Pharmaceuticals for almost $700 million. pharmaceutical companies is as strong as it has The new issue markets were active in July, but secondary been in many years. Most companies have returned offerings were more restrained. The U.S. market priced to positive revenue and earnings growth, which are seven IPOs to raise almost $1 billion, over $700 million of uncorrelated with the global economy. Additionally, which was the debut of contract manufacturer Patheon. large pharmaceutical stocks are often a bellwether Two initial offerings were priced in Europe to raise $85 defensive play during periods of broader financial market million. Nine companies, seven in the U.S. and two uncertainty. Political rhetoric on drug pricing in the U.S. abroad, completed secondary equity offerings totaling by presidential candidates should remain a headwind, $640 million. or at the very least represent headline risk during the Global regulators continued to approve new coming months. medications. The FDA granted approval to Shire’s Xiidra Managed care industry fundamentals remain strong, to treat dry eye and Sanofi and Zealand Pharma’s Adlyxin including robust growth for government programs for diabetes. We believe that Xiidra has the potential and low utilization in core commercial and government to become a global blockbuster brand and expand the businesses. Our enthusiasm for the industry has market for dry eye treatment. In Europe, the European moderated somewhat because we saw significant value Medicines Agency (EMA) endorsed Exelixis and Ipsen’s creation from proposed consolidation, which is now Cabometyx and Eisai’s Kisplyx, both for kidney cancer, less likely to be consummated. That said, we continue Baxalta’s Onyvide for pancreatic cancer and Allergan’s to allocate capital to managed care, emphasizing Truberzi to treat diarrhea. The EMA also endorsed two government-oriented businesses and optionality with new biosimilar brands that will compete with Sanofi’s respect to mergers. Finally, we do not believe the current Lovenox. turmoil in the market for individual coverage will have a material impact on the long-term earnings potential of Outlook the industry. Our long-term optimism about the health care sector in The pharmaceutical value chain, which includes general and, in particular, the large cap biotechnology/ drug distributors, pharmacy benefit managers and pharmaceuticals group remains strong. We continue prescription drug retailers, has experienced a substantial to seek investments in companies that are finding correction since the middle of 2015. The market is innovative therapies targeting large unmet needs and struggling to understand the growth prospects of those that help reduce overall health care expenditures. these companies, and has started to discount the end We continue to advocate positions in companies with of growth driven by generic drugs. While we actively uncorrelated catalysts, clinical read-outs and M&A to reevaluate our generally negative stance on the group, generate attractive returns. we remain cautious until the companies reduce longer The underlying fundamentals of the biotechnology term growth targets and investors more fully revise industry remain healthy, and we continue to recommend their expectations. significant exposure to the group. The innovation We expect more moderate performance for the life story remains intact, and pricing has not materially science tools & services group, where valuations already deteriorated from our expectations. Large cap reflect an improving end-market environment. We biotechnology and pharmaceuticals valuations are also continue to expect in-line or underperforming supported by strong cash flows and underappreciated results for the health care technology, contract research pipelines. We are beginning to see better values in organization and diagnostic laboratory industry sub- biopharmaceuticals and look to take advantage of sectors. ClearBridge Investments 620 Eighth Avenue, New York, NY 10018 | 800 691 6960 ClearBridge.com Past performance is no guarantee of future results. and may differ from other managers, or the firm as a whole, completeness of this information cannot be guaranteed. Copyright © 2016 ClearBridge Investments. and are not intended to be a forecast of future events, Neither ClearBridge Investments nor its information All opinions and data included in this commentary are as of a guarantee of future results or investment advice. This providers are responsible for any damages or losses arising June 30, 2016 and are subject to change. The opinions and information should not be used as the sole basis to make from any use of this information. 2views expressed herein are of the ClearBridge Investments any investment decision. The statistics have been obtained Global Health Care Innovations portfolio management team from sources believed to be reliable, but the accuracy and .