On January 7-10, 2013, JPMorgan hosted its 31st Annual Healthcare Conference in San Francisco, CA. This year there were approximately 400 presenting companies (including 61 private and 30 Asian), 8,600 attendees and 8,000 one-on-one meetings. Complementing the company specific sessions were lunch speakers and panels. Notable speakers included Bob Woodward, Associated Editor, The Washington Post and author of The Price of Politics, Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. (JPM) and William Frist, MD, Partner, Cressey & Co. and former U.S. Senate Majority Leader.
With so much activity and an endless amount of information available, how attendees choose to utilize conference time is based on what he/she is looking to get out of the event. It can range from generalist investors seeking their first introduction to a company, to company and industry experts looking for a specific piece of information to test their investment thesis.
Generally those new to a company will spend more time listening to the management presentation (30 minutes), and those more familiar with it will camp out in the breakout rooms (30 minutes of Q&A). This article's goal is to focus on the action inside the breakout rooms. Its purpose is to harness the messaging power of the largest gathering of healthcare financial professionals of the year. For example, dominant themes would often emerge, and given the kind of influence this audience (some very large shareholders) has on stock prices, the main messages from these breakout sessions have significant investment value.
Key themes from attending 23 breakout sessions:
- Investors Search for the Next Alexion Pharmaceuticals
- Early Winners in Healthcare IT
- When Selling Equity Is Good
Investors Search for the Next Alexion Pharmaceuticals:
When Genzyme was acquired by Sanofi-Aventis (SNY) in February 2011, the preeminent ultra-orphan drug company was rendered un-investable. For reference, ultra-orphan therapies target patient populations of 10,000 or lower and usually command prices in excess of $200,000/year. Savvy investors quickly filled the void and found Alexion Pharmaceuticals (ALXN), whose shares needed only a year and half to double. Alexion's claim to fame is Soliris, a $440,000 therapy first approved for paroxysmal nocturnal hemoglobinuria (PNH) in March 2007. Since then, it has been approved for atypical hemolytic uremic syndrome (aHUS) and is currently in clinical trials for four more indications.
Alexion's rapid ascent and earnings power caught many investors by surprise. Intending not to miss out on the next rising star in the ultra-orphan drug space, investors made these companies the most popular at the conference - no standing room during the main presentation and breakout sessions.
The candidates are:
Aegerion Pharmaceuticals (AEGR)
Market Cap: $695mm
Consensus 2013E Revenues: $20mm
Key Product(s): Juxtapid for homozygous familial hypercholesterolemia (HoFH) -- first two doses $235,000/year, then $295,000/year
· Led by Marc Beer, CEO and former VP Global Marketing, Genzyme
· Juxtapid, the company's only commercial product, was approved Dec 2012
· Management has a good handle on the potential patient population and how to market the drug
· Further opportunities for Juxtapid include Europe, Japan, and the pediatric population. Expect mid-2013 EU approval
· Not concerned about Kynamro, a competing drug from Isis Pharmaceuticals (ISIS)
Conclusion: Aegerion appears to have a good drug and an experienced leadership team to ensure a successful launch. However, Juxtapid's label expansion opportunities are not as robust as Alexion's Soliris, and the drug also faces potential competition from Kynamro. Good company, but in current state not the next Alexion.
BioMarin Pharmaceutical (BMRN)
Market Cap: $6.9bn
Consensus 2013E Revenues: $562mm
Key Product(s): Naglazyme for mucopolysaccharidosis VI (MPS VI) -- $365,000/year, Aldurazyme for mucopolysaccharidosis I (MPS I)-- $200,000/year, Kuvan for phenylketonuria (PKU) -- $57,000/year, GALNS for mucopolysaccharidosis IVA (MPS IVA) - completed Phase 3
· Experienced ultra-orphan company with multiple approved products
· In Nov 2012 released very good GALNS Phase 3 results, and expects to file for U.S. approval in 1Q13
· GALNS would be BioMarin's third drug for treating MPS
Conclusion: BioMarin is a company with a proven track record of selling ultra-orphan drugs. However, investors have been waiting many years for this company to show a consistent profit. With a GALNS approval combined with a good launch, this may finally happen. What investors love about Alexion is how quickly the company achieved profitability and the ensuing profit growth. This is BioMarin's time to show that it can drop sales to the bottom line, and thus it is one to watch.
NPS Pharmaceuticals (NPSP)
Market Cap: $752mm
Consensus 2013E Revenues: $145mm
Key Product(s): Gattex for short bowel syndrome -- $295,000/year, Sensipar for secondary hyperparathyroidism, Natpara for hypoparathyroidism - completed Phase 3
· Gattex, the company's lead product, was approved Dec 2012.
· In conjunction with approval, NPS was asked to conduct post-market study to evaluate cancer risks
· Management has changed its estimates on the size of Gattex's available market. Over the last year the number of potential short bowel syndrome patients has fallen from 15,000 to 3,000-5,000
· Filing of Natpara BLA by mid-2013 could be delayed due to manufacturing and pen usability issues
· Collects royalties from Amgen's Sensipar (2012 sales $950mm) and other therapies
Conclusion: Many questions surround NPS. Management's estimates of Gattex potential has changed multiple times over the last year, and cancer concerns could limit uptake. Management also faces execution issues with Natpara. However, NPS is well positioned from a financial perspective. The company burns very little cash because royalty revenues cover most expenses. With a decent Gattex and/or Natpara sales ramp profitability is in sight. NPS could then catch investors by surprise just like Alexion did when it reported better than expected initial uptake of Soliris. That being said, Gattex is a niche drug without the label expansion opportunities of Soliris. Maybe having Natpara approved can make up for that.
Early Winners in Healthcare IT:
In 2009 the HiTECH Act was passed. This legislation mandated the adoption of electronic health records (EHR). Beginning in 2011, healthcare providers were incentivized to adopt and demonstrate meaningful use of EHR. But by 2015, if any provider has not implemented electronic health records, penalties will be levied.
As a result, most EHR software providers experienced a huge boost when customers initially implemented the technology without much scrutiny. However, medical software companies began to diverge by mid-2012. Customers began to realize that all EHR platforms were not of similar quality. Hospitals and providers began to question whether the technology provided true benefit and/or a justifiable return on investment.
Some companies have now distinguished themselves from the pack. It's clear from the conference and stock prices that investors have chosen the early winners. For these companies there was no standing room during the main presentations and breakout sessions.
Market Cap: $3.1bn
Consensus 2013E Revenues: $538mm
Key Product(s): Cloud-based services for practice management, electronic health records and care coordination
· Led by Jonathan Bush, CEO, Co-Founder and healthcare IT's biggest cheerleader
· On January 7, 2013 the company acquired Epocrates (EPOC). Epocrates provides drug reference tools to health professionals and serves 340,000 doctors (roughly half of the physicians in the U.S.)
· Built business targeting small and group practices, now attempting to grab hospital and health systems
· Has my vote for "most popular" of conference
Conclusion: With the Epocrates acquisition athenahealth aims to increase mindshare among physicians. Current awareness rating: 90 percent for EPOC vs. 30 percent for ATHN. Management hopes that better branding will help them win larger deals. On January 9, 2013 the company showed progress towards this by announcing two enterprise healthcare deals, and the stock popped more than 6 percent. One of the deals was with Emergency Medicine Physicians, an 800 member physician-owned medical group, spanning 60 hospitals in 14 states. This provided many investors with the evidence that athenahealth can compete in this market. ATHN will end 2012 with revenue growth 2-3x that of the healthcare IT market. By winning more large deals in the future, the company should continue to distinguish itself from its peers.
Market Cap: $14.3bn
Consensus 2013E Revenues: $3.0bn
Key Product(s): Healthcare IT/software for hospitals, physicians, ambulatory facilities and other healthcare related entities
· Led by Neal Patterson, CEO and Co-Founder
· Largest public healthcare software enterprise company
· Solutions used by more than 9,000 facilities worldwide
· In their opinion, there are one, maybe two competitors
· Main presentation was half as full as the ATHN presentation. Interest did pick up in breakout session, though.
Conclusion: Neal Patterson is known as a visionary in the health IT industry. However, very rarely are investors graced with his presence at conferences. So it was a treat to hear him address key industry issues of the industry in the breakout room. Cerner understands that there are industry/physician concerns regarding whether technology truly adds value; so the company is focused on developing more measurable solutions. Mr. Patterson gave an example of how data generated from their software was integral in saving lives at a given hospital, and commented how the downstream functions (such as reading a doctor's prescription) are more streamlined. It is this forward thinking that has enabled Cerner to become a $2.6bn revenue company.
Given its leadership and dominant position in the enterprise space with limited competition, there is no reason Cerner can't continue to outgrow the market.
Greenway Medical Technologies (GWAY)
Market Cap: $455mm
Consensus Jun 2014E Revenues: $184mm
Key Product(s): PrimeSUITE, a single integrated application with electronic health record, practice management and interoperability functionality. Available in on-premise, hosted and cloud.
· Led by Tommy Green, CEO and Co-Founder
· IPO Feb 2012
· Greater than 50 percent insider ownership
· Cloud offering grew 110 percent in most recent quarter
· Strong emphasis on ease of use and interoperability
Conclusion: Greenway is the "new kid on the block." Based on conference interest investors could be looking for an alternative to ATHN and CERN, as they have been disappointed by Accretive Health (AH), Allscripts Healthcare Solutions (MDRX) and Quality Systems (QSII). The company's products are known for ease of use and high customer satisfaction. Right now, showing 2012 sales growth of 2-3x the health IT market could be good enough.
When Selling Equity Is Good:
When companies make intentions to raise equity, the typical reaction is negative. Investors immediately fear that the company will dilute shareholders, and wonder, will the money raised be invested wisely? Why raise capital if there is no clear need? Elements of uncertainty are introduced into investors 'minds, and uncertainty means risk.
However, raising equity is not always an accurate leading indicator for negative price action. There are times where the initial downward reaction is misleading and the stock should be bought. But how do you know when to buy the dip? The answer lies in knowing when investors actually want the company to issue equity, and can usually be found in observing investor questions and reactions to management explanations. In the breakout rooms at the conference this was the case, and in large part the feedback was positive.
NewLink Genetics (NLNK)
Market Cap: $257mm
Consensus 2013E Revenues: $2mm
Key Product(s): HyperAcute Pancreas for adjuvant surgically-resected pancreatic cancer
Conference Interest: Low, maybe 5 present in breakout session, though attendance tends to be lower on last day
· After releasing positive Phase 2 data for HyperAcute Pancreas, the stock was up more than 50 percent in 2012
· With one year of cash remaining, management is considering taking advantage of this situation
· Filed shelf registration Dec 2012
· Next major catalysts: Phase 3 first interim analysis in early 2013, Phase 3 fully enrolled by end of 2013
· Average daily volume is 82,000 shares
Conclusion: Conducting clinical trials is inherently risky. If Phase 3 results are poor, then NewLink would likely need to raise highly dilutive equity to be an ongoing concern. Given the strong stock price, why not get in front of this event, and proactively raise inexpensive capital. This would de-risk the company by enabling it to strengthen its balance sheet. Also, large investors have expressed interest to the management that they would like to invest, but that the lack of liquidity was a gating factor. With an equity offering, NewLink would appease investors. As of this writing, NewLink sold 4.6mm shares at $11.40 on January 30, 2013. Uninformed investors sold the stock after-hours, only to see the next day that demand was very strong as the stock immediately traded up.
Market Cap: $1.1bn
Consensus 2013E Revenues: $268mm
Key Product(s): OmniPod, a wireless, waterproof insulin pump
Conference Interest: Standing room only in breakout session
· Stock up 30 percent from 2012 lows
· New generation of OmniPod received 510(k) clearance from FDA in Dec 2012
· Manufacturing transition should not be a problem
· Has never been profitable since inception
· Sold 4.1mm shares at $20.75 on January 4, 2013
· Average daily volume is 339,571 shares
Conclusion: For context, investors need to remember what happened to Insulet in March 2009. Caught by the financial crisis, PODD's cash balance was insufficient to cover its annual burn rate. The stock reached a low of $2.57, down approximately 30 percent in three months and 90 percent in a little over a year. The company was forced to raise extremely dilutive capital - borrowing $27.5mm at 9.75% and issuing 3.75mm in exercisable warrants at a $3.13 strike price.
So when asked the question, "Why issue $85mm in equity?," Duane DeSisto, CEO, simply answered, "we've been burned before," (implying that the company never wants to find themselves in a similar situation again). The stock had had a good run and given that the company was still burning cash, it was a good time to raise capital. Any kind of economic hiccup and Insulet could easily repeat past history. Also, the company is looking to improve liquidity and attract more investors. Since selling equity the stock has done nothing but go up, and this continued through the conference.
Closing Thought: The JPMorgan Healthcare Conference lived up to expectations and offered numerous ideas for further consideration. In an environment where many investors are still worried about the economy, focusing on healthcare is a great way to start 2013.