Given that we are just past the midpoint, I thought it would be a good time to review and update my 2018 forecast and stock picks. As I suggested, 2018 has turned out to be a stockpicker's year. The fundamentals of the US healthcare industry remain strong, as demographics, chronic disease prevalence and an improved employment market provide for favorable tailwinds.
As for my investment themes, one focus is on leading companies, notably Intuitive Surgical (ISRG) and Illumina (ILMN). They are leaders in their respective fields (robotic surgery and next-generation sequencing), and the technologies they have are revolutionary. While the stocks are expensive, I remain a buyer as I expect consensus-exceeding growth to continue. Intuitive Surgical is facilitating and improving less invasive surgery with its robotic systems. Furthermore, as I have stated for years, competition is less significant than is perceived, given that two generations of surgeons have been trained on da Vinci systems and they, and the associated hospitals, are unlikely to switch. Furthermore, the company continues to innovate, broadening the applicability and surgical specialties that would benefit.
Illumina is a leader in next-generation sequencing, which is driving advances in genomics, molecular biology and drug discovery. This revolution is still in the "early innings". Cancer immunotherapy will continue to result in improved outcomes for decades. Whereas Cryoport (CYRX), as a derivative beneficiary, has performed well in 2018 (+74%), Novartis (NYSE:NVS) is flat. I view both positively. Although the CRISPR/Cas9 stocks have done well as a group, concerns have been raised about the technology and implications regarding genetic damage. Therefore, I have reduced my exposure to this area, pending fuller appreciation of the risks.
AbbVie (ABBV), one of my favorite stocks, is down 3% this year due to a setback with Rova-T (not part of my thesis) and concerns regarding Humira biosimilars. I expect AbbVie to continue to deliver top-tier growth, driven by its current portfolio and pipeline. Furthermore, the stock's conservative P/E (12x) makes it especially attractive. Lastly, I remain enthusiastic regarding developments in treating NASH, which will soon be the leading cause of liver transplants. Wall Street continues to react to favorable news; as a result, Madrigal (MDGL) has advanced by 174%. In Hepatitis B, where improved therapeutics are needed but progress is slower, Arbutus (ABUS) has generated promising early stage data. Its stock is up 125%. I am long both.
As far as new investments, in keeping with my leadership in growing markets theme, I have been buying Abiomed (ABMD) following its June (Q1) quarter report (wish I had stated that five years ago!). The company's Impella heart pumps are used in high-risk percutaneous interventions, advanced heart failure and cardiogenic shock, and are in the early stages of adoption. The Impella has been shown to reduce mortality, improve quality of life, and in cardiogenic shock, lower costs. The company is expanding its worldwide presence and its product offerings.
I am also buying Tandem Diabetes (TNDM), which has a 12% share of the US diabetes pump market. The company is benefiting from the market exit of Animas and its recently approved t:slim X2 insulin pump with Basal-IQ technology and DexCom (DXCM) G6 sensor compatibility. This pump will offer predictive low glucose (hypoglycemia) alerts and the need for far fewer finger sticks. In 2019, the company should receive approval for its Control-IQ system, which will optimize basal insulin delivery. Additionally, Tandem will begin recording international revenues later this year. Management raised 2018 revenue guidance from a range of $132-140 million to $140-148 million versus $103 million in 2017. I view this forecast as appropriately conservative, with my estimate being $152 million. In 2019, I expect revenues to exceed $200 million. Given the typical four-year renewal cycle, the company should benefit incrementally from the fact that it shipped 10,800, 15,500 and 16,900 pumps in 2014, 2015 and 2016, respectively. With the recent stock price appreciation, I would expect management to consider an equity raise to eliminate $82 million of debt, at 9.5% cash interest, on its balance sheet.
Over the remainder of 2018, I continue to expect data-driven performance in the pharmaceutical sector, whereas in medical devices, earnings will be the key factor. The fundamentals contributing to healthcare spending are long-lasting. Areas most amenable to drug advances include oncology, hepatology and immunology. As previously, I remain skeptical, unfortunately, regarding later stage research efforts in Alzheimer's disease.
Disclosure: I am/we are long ISRG, ILMN, ABBV, TNDM, ABMD, CYRX, NVS, NTLA, MDGL, ABUS.
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.
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