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  • CareFusion: Increasing ROIC Provides Significant Upside Even With Modest Top-Line Growth [View article]
    Some wrap up comments in the wake of the BDX acquisition of CFN. We think CFN has been grooming itself for such an event since it was spun out from Cardinal in 2009. Its medical management and especially infusion pumps business complement BDX quite well. BDX makes needles, syringes, catheters and other related devices. Carefusion's infusion pump business makes the combination a one stop shop for hospitals. Like other recent medical device deals, BD is reaching for scale and, with the complementary medication management business extends that platform and provides just that.

    Becoming a part of BD also jump starts CFN's effort of overseas expansion. 75% of the companies revenue is domestic. International was the next big leg of growth for CFN, but it was a rather tough row to hoe as the company needed to go up against players like Braun and Hospira in international markets. BD already has scale and gravitas in those markets, with 60% of its revenue coming from overseas, 25% of it from emerging markets. The latter may be a trouble spot for the moment, but in the long-term it represents Carefusion's best opportunity to accelerate top line growth. Importantly, it enables the company to diversify away from the US where infusion pumps have been under regulatory scrutiny for several years.

    Based on where CFN is today, we believe the purchase price is adequate. The company had made many operational improvements, but returns on invested capital were still lower than we would have like, but slowly continuing to improve. Based on our FY 2105 estimates the deal is at about 12.5x EV/EBITDA. If BD can reduce SG&A by a third that drops to approximately 9.6x, not far from its current valuation.

    In the healthcare environment in the US, scale is key as both a marketing tool and cost efficiency, as CMS is more aggressively looking to reduce reimbursement and move from fee-for-service to patient-outcomes as the key for rates. The BDX/CFN combination provides the bigger BD with just that; plus, new products lines to push through BD's already established international infrastructure. On paper it looks like an excellent deal at a decent price.
    Oct 6, 2014. 06:02 PM | Likes Like |Link to Comment
  • Forest Labs: Finally Time To Buy Again - Favorably Skewed Risk-Reward In The Next 24 Months [View article]
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    The lesson of Forest Labs? Follow the management team. Brent Saunders was brought into the company basically to appease Carl Icahn. A great move we thought since he had been a protege of Fred Hassan, who had experience in turning around big pharma companies. Howard Solomon, the CEO for 36 years, was bumped up to Chairman.

    Solomon had a very successful run with Forest for many years. However, there came a point to where he was no longer the CEO that the company needed. Under his leadership, the last few years was marred with major patent expirations with little to take those products place, despite a massive cash war chest. Mr. Solomon never seemed interested in using his overly pristine balance sheet to fill in the product gaps; preferring instead to be patient in the growth of Forest's new product portfolio. To be fair, much of the "turnaround" (if Saunders was there long enough before the ACT merger to call it a turnaround) strategy Saunders articulated upon assuming the head role involved pushing those drugs Mr. Solomon had put in place. However, he forcefully articulated a strategy of using the balance sheet to push drive top line growth. The stock began to run as investors gained confidence.

    Other specialty pharma companies had similar experiences in the past few years. IPXL and ENDP within the last year with both stocks doing well. HSP and VRX were similar stories from a few years ago. The point is that there are only so many really good management teams out there. Follow the ones that can make you money. If your thesis goes to hell at least you know you have the right person at the helm.
    Sep 7, 2014. 10:28 AM | Likes Like |Link to Comment
  • Forest Labs: Let The Good Times Roll - Reward To Risk Still 2:1 [View article]
    The lesson of Forest Labs? Follow the management team. Brent Saunders was brought into the company basically to appease Carl Icahn. A great move we thought since he had been a protege of Fred Hassan, who had experience in turning around big pharma companies. Howard Solomon, the CEO for 36 years, was bumped up to Chairman.

    Solomon had a very successful run with Forest for many years. However, there came a point to where he was no longer the CEO that the company needed. Under his leadership, the last few years was marred with major patent expirations with little to take those products place, despite a massive cash war chest. Mr. Solomon never seemed interested in using his overly pristine balance sheet to fill in the product gaps; preferring instead to be patient in the growth of Forest's new product portfolio. To be fair, much of the "turnaround" (if Saunders was there long enough before the ACT merger to call it a turnaround) strategy Saunders articulated upon assuming the head role involved pushing those drugs Mr. Solomon had put in place. However, he forcefully articulated a strategy of using the balance sheet to push drive top line growth. The stock began to run as investors gained confidence.

    Other specialty pharma companies had similar experiences in the past few years. IPXL and ENDP within the last year with both stocks doing well. HSP and VRX were similar stories from a few years ago. The point is that there are only so many really good management teams out there. Follow the ones that can make you money. If your thesis goes to hell at least you know you have the right person at the helm.
    Sep 5, 2014. 05:36 PM | Likes Like |Link to Comment
  • Impax Labs: Beyond The Hayward Debacle, High Reward, Manageable Risk [View article]
    IPXL is up 52% and nearing our $35 price target set in October 2013. Much of what was anticipated in that report has occurred; most notably, the appointment of a seasoned CEO, the re-filing of Impax lead branded compound Rytary and progress in the remediation of the Hayward plant. The new PDUFA for Rytary is October 9, 2014. Management must be confident that Hayward is sufficiently remediated for the FDA to seriously consider approving Rytary. In addition, Impax launched the authorized generic version of Sanofi’s Renvela which should generate an additional $70 milllion in operating profit, significantly boosting consensus estimates.

    Although we believe there is additional opportunity for upside, much of the initial upside has been priced in with a reward:risk of 1.4:1 considerably lower than 2:1 of October 2013. Our updated DCF derives a price target of $45 (up from $35) with a downside of $18 (up from $15). The downside is still considerable because the Hayward difficulties are not yet completely resolved which still could impede an approval of Rytary. At a minimum, for those holding large positions, we recommend taking some capital off the table. That said, additional moves by the company and M&A could spur further gains.
    Jun 20, 2014. 05:21 PM | Likes Like |Link to Comment
  • Premier Inc.: Healthcare Crisis Creates A Growth Environment [View article]
    The company earns administrative fees for purchasing medical supplies, drugs, equipment for its members. Also, hospitals pay a fee for licensing its SaaS platform in whole or just for specific modules.
    Jun 5, 2014. 01:35 PM | Likes Like |Link to Comment
  • Long - Premier, Inc.: Newly Traded Company Offers Significant Upside [View article]
    Your analysis is very interesting. I do think there is an issue with the peer group. Those companies are all healthcare, but they are all in different industries within healthcare and are driven by different factors. A small cap biotech company is drastically different than a home health company which is drastically different from a diagnostic company etc. I agree with your conclusion that there is upside and the stock is relatively unknown and thus under-appreciated: however, it would seem for your EVA model to be accurate the peer group needs to be driven by factors more closely related to PINC.

    Enjoyable read. Thanks.
    Apr 21, 2014. 04:15 PM | 1 Like Like |Link to Comment
  • GTx Inc.: Well, The Package Is Late To Arrive, But It's On Its Way [View article]
    Speaking as a long time follower of GTx and former analyst who covered the company, Cora has written some of the most thoughtful research on the company I've seen. She has provided real insight into the clinical meaning of the data and the commercialization potential of the pipeline.

    It is unlikely that GTx will run out of capital. The Chairman of GTx, Pitt Hyde, is the founder, former chairman of Autozone and a billionaire. He provided much of the seed capital for the company and has been willing to stick with the company through some difficult times. Given the multiple opportunities GTx has in front of it, Mr. Hyde can bring to bear the capital necessary to see these opportunities through to fruition. Moreover, as Cora has so adeptly pointed out, the data from the various compounds are intriguing enough to entice other investors or strategics to come onboard.

    Nothing in small biotech is a layup, but GTx appears to be on the cusp of achieving what Dr. Steiner began years ago. It has been a longer, bumpier road than anyone expected, but, then again, it usually is for companies with innovative therapies. With the clinical disappointments GTx has had, most companies would have already gone by the wayside, GTx's thoughtful approach to its clinical programs has kept it alive to fight another day and the risk-reward here is incredibly favorable.
    Feb 20, 2014. 11:53 AM | 2 Likes Like |Link to Comment
  • Momenta: Impending Approval Provides Price Support With Excellent Upside Potential [View article]
    user 7310991,

    Thank you for your comments. Maybe I did not convey my thinking as clearly as I should have.

    First, I agree that the Copaxone approval is the near term catalyst. I hope I made that clear. I also agree that the 50/50 split is huge for the company. And had Teva been able to get the 3x per week dosing earlier a more significant patient switch may have been possible, but now I believe you are correct that it is not enough to defend the franchise unless there is a significant price reduction.

    Second, I hope you didn't take from the article that I have an unfavorable view of the technology or the business. It is highly likely that the technology pans out in biosimilars. If it does this could put Momenta in a unique regulatory and clinical positions versus competitors, which would make the valuation much higher than what I have modeled.
    Feb 12, 2014. 05:56 PM | Likes Like |Link to Comment
  • ISRG: Further To Go Before The Clouds Lift - Short For 50% Gain, Limited Loss Potential [View article]
    It's early. $40 on $380 stock is 11%, hardly a home run.

    Time will tell.
    Jan 11, 2014. 12:49 PM | 1 Like Like |Link to Comment
  • ISRG: Further To Go Before The Clouds Lift - Short For 50% Gain, Limited Loss Potential [View article]
    Gary,

    If one waited until there were an FDA investigation or a class action lawsuit or an adverse outcome of a lawsuit the opportunity would be missed. Equity analysis is not about waiting on an event to happen and then investing. The market does not look in the rear view mirror. There have been more patients coming forward. Whether those patients come forward through attorneys or have reported adverse events to regulatory authorities is irrelevant. It's the numbers of patients and the increasing spotlight on the adverse outcomes that does matter.

    You are also missing another important point. The customer's that are supposed to be buying da Vinci have concerns at this point and are less likely to purchase until questions are answered. Whether their concerns are well-founded remains to be seen, but until then perception is reality.

    There is a cloud of suspicion over the stock. Another quarter of missed expectations will send ISRG lower. There is considerable evidence this is likely.
    Jan 3, 2014. 10:26 AM | 2 Likes Like |Link to Comment
  • ISRG: Further To Go Before The Clouds Lift - Short For 50% Gain, Limited Loss Potential [View article]
    Thank you for your comments. To address some of the issues you raise:

    Whether patient complaints are increasing because of publicity or because of trial lawyers does not matter. There is still more patients coming forward. This is part of why it may take more time for the company to recover. Unfortunately, the legal community further dramatizing (in fact they often make it a melodrama) complicates recovery as they file suit whether really warranted or not.

    Maybe I have not effectively communicated a couple of points. Whether the cause of patient complaints is machine defect or surgeon error is somewhat irrelevant. The company still has to deal with it and more people coming forward raises regulatory and legal risk, which, in turn, will effect revenue growth. This may be a short term phenomenon, if one defines short term as 12 or so months. But, the company still has to go through the pain of dealing serious accusations that there are problems with its device.

    Hospital administrators are certainly not opposed to purchasing da Vinci in principle. But, the ones with whom we have spoken are reticent about purchasing until the smoke clears. Plus, as someone discussed, we're talking about sales at the margin that make the difference. da Vinci has already penetrated a considerable portion of the market. Procedure volumes appear to still be growing, but based on less system sales it is highly like instruments and accessories sales will decelerate, at least in the short term.

    This is probably an intermediate term issue that at some point will be resolved. We just don't see it happening soon and that will create pressure on Intuitive's financials. Intuitive is obviously an innovative company on the cutting edge of medicine. There will probably be a time to be long again, this just doesn't appear to be the moment.
    Jan 2, 2014. 10:23 AM | Likes Like |Link to Comment
  • ISRG: Further To Go Before The Clouds Lift - Short For 50% Gain, Limited Loss Potential [View article]
    Thank you for all your comments.

    There is absolutely no question that robotics are the future. And, Intuitive may very well back on top at some point. However, robotics being the future should not be confused with whether ISRG is a good long investment at this point in time. Those are two totally separate issues.

    What will drive ISRG is higher system sales leading to higher instrument and accessory sales. There is very little catalyst at this point. One only speak to a few hospital administrators to make that determination. They are a very risk averse group and they are wielding more purchasing authority now than ever (increasingly the surgeons work for them as they buy out private practices). Until Intuitive Surgical can demonstrate a clear patient care benefit and cost savings with less liability risk, putting out well over $1 million for each da Vinci isn't worth it. If the machines prove not to be the primary culprit in botched surgeries, they will still demand surgeon training standards. That does not happen over night.

    These are hardly minor issues. The MAUDE database is being filled with too many complaints for these to be isolated incidence. If it continues FDA would be forced to take action. I am not saying that will happen and it does not need to for my thesis to be correct. However,if anything the number of patient reports appears to be gaining momentum.

    These types of issues never go away easily or quickly, e.g, transvaginal mesh for female stress incontinence and silicone breast implants are just two of a long list of examples.

    Avoid it, short it, or buckle up.
    Dec 31, 2013. 02:37 PM | 1 Like Like |Link to Comment
  • CareFusion: Increasing ROIC Provides Significant Upside Even With Modest Top-Line Growth [View article]
    It's been four years since CareFusion was spun out of Cardinal. Presumably, goodwill impairment analysis has been conducted every year. Could a charge occur? Yes. Say, if the infusion pump business deteriorates due to regulatory matters. However, I have no reason to believe that either of the major business units has deteriorated; in fact, those units have been strengthened. So my assessment is that the impairment risk is minimal.

    The advantage of future acquisition against restructuring depends on the acquisition. If it is a good acquisition at a reasonable price comparing ROIC vs. ROE is a high class problem. In my own view, ROE is an inferior measure of valuation creation than ROIC. One of the bets one is making with CareFusion is that capital is rationally allocated to maximize the ROIC. So far, so good.

    The final question circles back to the first. Unless the company completely realigns (and I don't see that happens because Procedural Solutions is back on track and the company has gained a better recurring revenue stream in the medical segment because of its competitor's regulatory issues) the business I don't see major assets sales ahead. There is still some cleaning up to do, but much has been accomplished in the last four years. So, the risk to the balance sheet moving forward should be diminished.
    The bottom line is that the capital structure of CareFusion has been improved because of the retooling of the business units. There is always risk to the balance sheet with as much intangible assets as CareFusion has, but think risks are diminishing. At least, that's part of the thesis you have to buy into.
    Nov 16, 2013. 03:38 PM | Likes Like |Link to Comment
  • Forest Labs: Let The Good Times Roll - Reward To Risk Still 2:1 [View article]
    Thanks for taking the time to read and you kind comments.
    Nov 14, 2013. 05:22 PM | Likes Like |Link to Comment
  • Impax Labs: Beyond The Hayward Debacle, High Reward, Manageable Risk [View article]
    All of the comments regarding Hayward are well-founded. I appreciate the discussion and perspective. As mentioned in the article Hayward is THE risk in the business. That's why this is speculative. Not for the faint of heart. It's also why we pushed a launch for Rytary out so far. No one is saying Hayward will be cleared in the near term. So if your time horizon is short, stay away. We've made a lot of money picking up troubled companies a that nadir and riding out the storm if we think the downside risk is measurable.

    As far as WPI having had regulatory issues regarding its plant, most pharmaceutical companies that have been in business any length of time run into this. It is a positive for Impax that Chao has dealt with this before.

    With regard to IPXL being a takeout candidate now, it's certainly possible. However, in general, a suitor large enough to do it would rather pay up than take on the risk.
    Oct 16, 2013. 10:25 AM | 1 Like Like |Link to Comment
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