Healthcare: The 'Week That Was' Was Good

by: Leonard Yaffe


Last month, I  explained my rationale for expecting favorable performance from healthcare stocks in January. In biopharmaceuticals, I highlighted Juno Therapeutics, bluebird bio, Madrigal, Arbutus, Conatus  and Durect, among others.

Last week, most of the healthcare universe converged on San Francisco, where multiple conferences were held. Managements provided updates on products, pipelines and strategy.

During this past week, Madrigal performed well, and news tonight has Juno higher.  I continue to strongly believe that we are in a multi-decade revolution in cancer immunotherapy.

Regarding oncology, I forecast continued consolidation, as larger drug companies need to be represented in the newer therapeutic modalities. These buyouts should occur at a considerable price premium.

I also remain favorable toward Intuitive Surgical, Illumina and Foundation Medicine.  The company managements pre-announced favorable results.

Healthcare stocks performed well last week, and despite today's decline, tomorrow looks positive, given the rumor that Celgene (CELG) is in talks to acquire Juno (JUNO). The latter stock is up sharply in the aftermarket. It is important to realize that worldwide sales of oncology drugs exceed $100 billion, and are growing in excess of 10% annually. An increasing percentage of the incremental sales will be comprised of immunotherapies, and this observation, along with upcoming patent expiries on older drugs, will necessitate more acquisitions and partnerships by larger pharmaceutical companies.

As an aside, I was fortunate to attend a Trout Group sponsored talk last week by Dr. Carl June, one of the pioneers in this area. He discussed the role of Car-T, TCR and TILs, their role in current cancers and future advances that will broaden the scope. Given that the first CAR-T infusion was in 2010, the field has advanced dramatically. As I have previously stated, I believe that Cryoport (CYRX) will remain a beneficiary of this revolution, as a cryogenic logistics provider. I also continue to recommend Illumina (ILMN) and Foundation Medicine (FMI), as diagnostics will be increasingly used to determine and guide pharmacotherapy.

Regarding medical devices, my top choice remains Intuitive Surgical (ISRG). Adoption of robotic surgery is increasing, driven by more procedures being advantaged by this technology and the fact that a second generation of surgeons is now being trained on da Vinci systems. Furthermore, the company continues to innovate, which will extend their involvement to additional organs.

As it relates to hepatology, I have been concentrating on NASH and Hepatitis B. My recommendations include Assembly Biosciences (ASMB), Arbutus (ABUS), Conatus (CNAT), Durect Corporation (DRRX) and Madrigal (MDGL). Lastly, I reiterate my belief that AbbVie (ABBV) is a top tier drug company whose stock should be owned.

The research renaissance in pharmacology continues across many disease states. This follows a period that roughly lasted from 1992-2010, where, with a few notable exceptions, most advances were incremental. Importantly, many of the key drug discoveries are being generated by smaller companies.

As a result, the mainstream pharmaceutical companies will need to make acquisitions, and investors are often slower to realize the opportunities. Furthermore, because the market capitalization of the innovators is often not great, the upside is more significant (as is the risk). This is one of the best times in the past 20 years to own small and mid-cap drug stocks.

Disclosure: I am/we are long ISRG, FMI, ILMN, CYRX, JUNO, ABBV, MDGL, CNAT, ASMB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.