We track Emerging Markets growth rates for our covered companies. It has accelerated consistently since mid-2016; in Q3 2018 it was 11.6% y/y. From Q1 2012 to Q3 2018, y/y growth has been: 6.4% (10.3% (9.1% (9.5% (6.4% (10.3% (9.1% (9.5% (7.4% (6.1% (3.9% (9.5% (6.4% (8.3% (10.9% (8.0% (7.5% (4.7% (3.6% (3.2% (4.4% (1.8% (3.6% (3.3% (5.8% (6.1% (7.4% (7.5% (9.1% (9.5% (11.6% (Exhibit 1).
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This report covers the bull/bear case, current controversies, relative growth prospects and more for our 10 US & EU global pharmaceutical companies.
The Medicare coverage gap, aka “donut hole”, has been a component of the Medicare Part D program since it was established in 2003. The presumed intent of the donut hole was to increase patients’ financial responsibility during some part of their care, with the hope that they would help contribute to making rational drug choice decisions. However, the enactment of the Patient Protection and Affordable Care Act (the “ACA”) in 2010 has sought to undo this – it encompassed legislation to lower beneficiaries’ financial exposure, with the goal of eliminating it completely by 2020.
In our conversations with investors downstream of launch, we’ve learned just how “off the radar” this remains. In this report we describe the Gardasil opportunity ahead. As part of our diligence we spoke with Mike Nally, President of Merck Global Vaccines.
We recently wrote a brief investor update on the investment case for BMY (BMY: Summarizing the Investment Case). In it, we said that it is time to move on from the idea that Opdivo+Yervoy in lung cancer is going to work. This is because the totality of the evidence thus far (from both BMY and AZN) has been that anti-CTLA4 therapies just don’t seem to do much in this particular tumor type. A bearish view on CTLA4 is not a thesis change for us, but for many of the former “bulls” on the stock it has been, and it is one of the reasons BMY shares have struggled.
On November 19th, we published a report (Global Pharmaceuticals - Removal of "Protected Drug Class" Status Coming?) claiming that the Administration may seek to change language related to the six “protected drug classes” in the near-term. Proposed changes have just been released (along with other proposals aimed at helping to manage healthcare spending; not addressed in this report). These proposals are not finalized, meaning it is not clear what ultimately survives the comment period that comes next; implementation would likely begin in 2020.
Presently, six classes of drugs are protected from aggressive formulary management in Medicare Part D plans. This “protected drug class” policy came into effect in 2003 when Medicare Part D was first established.
Merck (MRK) reported 3Q18 financial results on Thursday (10/25/18). The company came broadly in-line on revenues but beat on EPS. MRK narrowed its revenue guidance and raised its non-GAAP EPS guidance. In addition, MRK raised its quarterly dividend +15% for 2019 and announced a new $10B share repurchase authorization, which includes a $5B ASR. Keytruda was about in-line, Gardasil was a big beat, and lends support to our recent thesis that the growth opportunity for this product is an under-appreciated aspect of the story.
Merck (MRK) reported 3Q18 financial results this morning (10/25/18). This report summarizes key takeaways from the conference call that go above and beyond information provided in the press release.
We continue to like Merck as “the other bet” in IO (alongside BMY). Category growth in IO has a runway ahead of it that is long-enough and wide-enough to support two PD1’s, and that will allow them each to grow to mega-blockbuster levels. Similar to BMY, MRK embeds the same long-term upside optionality if anti-PD1s work in the “adjuvant” setting, yet here, too, there is nothing in MRK’s share price for this. To be clear,adjuvant data is only now starting to materialize, but it has been encouraging and the concept is biologically plausible. It should be appreciated that MRK is not a perfect story – apart from IO, much of the rest of its business is a “melting ice cube,” hamstrung by patent expiries or new competition, but this is a known problem and is discounted in already. However, one older product may now be sitting in front of meaningful upside – Gardasil – and this appears to be an unappreciated aspect of the story at the moment.
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