4Q19 product sales of $6.25B vs. our $6.43B and consensus $6.30B. Collaboration Revenue (“Externalization”) was $414M ($250 sales milestone and $100 option from MRK) vs our $145M. 4Q19 EPS of $0.89 vs. our $0.90 and consensus $0.96. Lower gross margin as % of sales (Epanova inventory write-down) and higher SG&A were offset by lower tax (core 14.6% for 4Q).
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What to do with BMY from here? The stock has had a nice run since mid-2019, playing out as we had hoped, which begs the question: is it time to take profits or let it ride? BMY is still a low multiple stock (vs peers) and a catalyst-rich story in 2020, for sure. Both in-line brands (like Opdivo) and pipeline products (from both CELG and BMY) sit in front of either important ph3 read-outs or regulatory approvals. These are the positives. However, the long-term outlook with BMY remains challenged by the mother of all patent cliffs - albeit the first major LOE is still a few years away (Revlimid; and it will be a gradual, phased generic launch) with bigger ones only coming later (e.g. Eliquis in 2026; Opdivo at the end of 2028).
ABBV reported Q4 results that were in-line on revenues but slightly ahead on EPS; a standout in the quarter, however, was Skyrizi (psoriasis) which posted a big number. On 2020, guidance on revenues was slightly below our estimate but 2.5% better than consensus, and EPS guidance was about 2% higher than us/consensus. A major focal point for investors – partly because there aren’t many other catalysts to focus on, such as a pipeline full of late-stage NMEs – remains ongoing Skyrizi and Rinvoq uptake trends, as the performance of these brands directly addresses the long-standing bear case with ABBV which is its heavy dependence on Humira (even after folding in AGN, US Humira will still account for ~30% of pro-forma revenues); international biosimilar erosion is already underway and US erosion lay ahead (2023). For 2020, management gave a robust set of estimates for the likely sales of these two “replacement” products which is helpful to the story. Upon questioning, ABBV also provided commentary on what to expect when US Humira biosimilars do eventually arrive in 2023 – it noted that analysts seem to model an erosion curve that looks like “stairsteps,” but in reality there may be faster upfront erosion partly because there will be 7 biosimilar sellers all coming to market at once (with erosion continuing beyond 2023 but at more moderate levels) thereafter. The company was asked whether it can growth through this 2023 impact and ABBV said it is too early to know (we model y/y contraction already). ABBV spent a fair bit of time talking about its pipeline – most of the late-stage pipeline is indication expansion on existing brands – in the early-stage pipeline there are variety of NMEs but these have not yet passed “proof of concept” (ABBV guides for 6 POC readouts in 2020) meaning they are hard to realistically assess (it’s the same with any drug company’s early-stage pipeline – lots of optionality, but little ability to predict what may survive, with the backdrop being that the majority of compounds will actually fail somewhere along the way). With AGN folded in, ABBV’s outlook is better but we find both positives and negatives in the transaction. On the positive side, the revenues/EPS trajectory post 2023 is better than before (even if only flattish), and ABBV is acquiring a collection of products at a reasonable valuation. On the negative side, AGN doesn’t bring much (or anything?) to the table in terms of R&D – which is the “core” of any drug company - and therefore the transaction can cynically be described as financial engineering, simply designed to backfill a coming hole in the parent company’s business. On a pro-forma P/E multiple basis the stock is indisputably cheap relative to peers, which is enticing, especially in the context of having a dividend yield of a little over 5%. Our rating is Peer Perform, but with a positive bias, as we have been noting in recent months.
AbbVie (ABBV) reported 4Q19 financial results this morning (2/7/20) – revenues were in-line, but small EPS beat. Revenues were $8.70B vs. our $8.77B and consensus $8.70B. EPS were $2.21 vs. our $2.20 and consensus $2.19. The bottom line beat was mainly driven by spending control on the SG&A and R&D lines, yielding a higher operating margin of 44.6% vs. our 43.6%.
During its Q4 earnings announcement on Wednesday (2/5/20), Merck disclosed its intention to spin off a collection of assets (mostly women’s health, biosimilars, and other “legacy” products representing about 15% of MRK’s total revenues). This will become a separate, publicly traded company (“NewCo”) in 1H 2021.
Merck management held a meeting with sell-side analysts today (02/06/20) to discuss: yesterday’s decision to spin out part of its business into a new publicly traded entity; the outlook for Keytruda and ongoing/future competitive dynamics; and other topics. Many good insights were provided, as detailed in this report. We continue to think what MRK is doing makes strategic sense. Big companies suffer from operational complexity and this new move is designed to mitigate that; and the spin mirrors what many other companies are doing in the space – i.e. jettisoning, in some way, parts of the business that are not viewed as being core to the future. In our view, it does not herald a change in viewpoint on any M&A targets MRK may be considering. It does increase MRK’s dependency on Keytruda (modestly) but when the product is growing as strong and fast as it is – which seems likely to continue for years to come – this leverage is beneficial to the P&L.
SAN reported a Q4 beat and presented 2020 guidance that was in-line w/ consensus. On its analyst call, the questions were fairly broad – Dupixent, SAN’s brain-penetrant BTKi in MS (smaller ph2 study top-lined positive today), weakness in China (that was largely expected), and other topics. On the BTKi (‘168), SAN thinks it will eventually be best-in-class given its brain penetration and no off-target effects, and even though the launch (2025?) won’t happen until after Aubagio goes LOE, they don’t view this as a problem (Gilenya may be generic as well before then – TBD). It is a bit unusual (at least for a big pharma) to put out a press release on a smaller phase 2 dose-ranging trial, esp without disclosing the results – it speaks to SAN’s understandable desire to show it has a pipeline of novel MOAs – ultimately, it will be the completion of a set of ph3 trials that defines where BTKi’s fit into an already-crowded category. On China, it’s a push and pull of volumes vs. the significantly lower VBP price; SAN notes that Jan shipments were strong, but we wait to see if this carries through into the rest of 2020 (SAN admits that they don’t know what the impact will be from the corona virus issue, but it would be naïve to think that there’s no disruption; other companies have more exposure to this issue, like AZN where China makes up ~20% of total company sales, 2x the industry average). On previously-given longer term guidance, SAN remains confident in hitting the targets that they presented at December’s CMD. On its pipeline, there have been a handful of successes since the CMD – bulls will wait baited breath to see what more there is to say at the R&D day on June 23. We remain in “wait and see” position with SAN, given past execution issues – getting new management in place is clearly a step in the right direction, and as expected, management is promising a turn-around, but these things take time, especially when it comes to R&D (witness GSK and its recent share price performance, because of their need to invest for future growth…). For more information on SAN and other stocks we cover, see: Global Pharmaceuticals - Jan 2020 Issue of "Monthly Controversies" Report.
ROG held a call for investors to present the risdiplam SUNFISH data presented earlier today (02/06/20) at the SMA Europe Scientific and Clinical conference. In SUNFISH, ROG chose to enroll a broad age range, and therefore chose the MFM32 endpoint because of its ability to register differences across a wide range of motor function. Unfortunately, this design confounds interpretation of the data. One population (younger patients, ages 2-5) benefit from risdiplam through improvement (>=3 points) and the second population (older patients) benefit by stabilization (>=0 points), but when these groups are combined together it is a bit of a muddle and makes the critical questions of value and treatment setting unanswerable. Multiple questions attempted to disentangle benefit in these separate populations to better compare against approved therapies, but the data providing these answers were not presented today. Risdiplam works, at a minimum by stabilizing the condition, and it is safe; approval is near certain and it will be a major product. But how should it be used? As a bridging therapy to curative gene therapy (this was our question), or alternatively, as continuous therapy? We look forward to further data presentations to delineate the value in each population and the best manner of use, necessary to fully size the commercial opportunity