The Week That Was In San Francisco: 2019 Should Be A Great Year For Healthcare Stocks

by: Leonard Yaffe

The annual healthcare confab in San Francisco was well timed, given negative investor segment and favorable developments.

I have previously commented on my expectation of continued mergers in the drug industry, driven by share fragmentation, pipeline needs, and recently, very attractive valuations.

Of my four biopharmaceutical company recommendations, Gilead, Amgen, Regeneron, and Celgene (Growth At a Reasonable Cost), I continue to recommend the latter three.

One of my favorite names over the past decade, Intuitive Surgical, continues to grow at a level above expectations, driven by procedure volume.

There were numerous highlights in the healthcare sector beginning 2019. First, the announced merger of Bristol-Myers (BMY) and Celgene (CELG) will create a strong entity in oncology and hematology and will be very accretive to Bristol's earnings per share. Wall Street had driven down Celgene's P/E to 8x due to its concerns over Revlimid's patent expiry next decade. However, Celgene has an impressive pipeline through its network of partners and its acquisition of Juno.

In 2019, Regeneron (REGN) should experience continued growth of Eylea, Dupixent, and Libtayo, as well as advances of its impressive pipeline in immuno oncology. In my opinion, its current P/E of 18x does not reflect its prospects.

Intuitive Surgical (ISRG) pre-announced 2018 results, which included above expectation procedure growth of 18% to over one million. For 2019, management forecast growth in the 13-17% range. Besides expanded applications, as a result of technological advances (single port, endoluminal access) and geographic expansion, Intuitive Surgical will continue to benefit from its dominant position in robotic surgery. Most of the current generation of surgeons trained in robotic surgery in the US have used only a da Vinci system, and 84% of US customers at academic institutions use a da Vinci simulator. Therefore, hospitals and physicians are highly invested, and Intuitive's commitment to innovation serves to strengthen the relationship. In 2019, I expect procedure growth at or above the high end of guidance.

Other notable themes include the tremendous opportunity in immuno oncology, which augurs well for Celgene, Regeneron, Merck (MRK), Amgen (AMGN) and others. Additionally, the media and logistics suppliers in the cellular therapeutics area, including BioLife Solutions (BLFS) and CryoPort (CYRX), should continue to grow rapidly. Of interest, the FDA released a statement Tuesday stating that it anticipates the number of product approvals for cell and gene therapies to grow in the coming years and that by 2020, it will be receiving more than 200 INDs per year. By 2025, the FDA will be approving 10-20 cell and gene therapy products annually.

In Type 1 diabetes management, DexCom (DXCM) noted that its Q4 2018 revenues advanced by 50%, with 45% growth in the US. In 2019, management forecasts revenue growth of 15-20%. Management highlighted the very successful G6 sensor launch, which bodes well for Tandem Diabetes (TNDM). I have previously highlighted Tandem, given the market share gains of the t:slim X2 insulin pump with Basal IQ that incorporates the G6 sensor. I continue to expect Tandem to record revenues that exceed analyst forecasts.

My short-term cautious view toward Gilead (GILD) relates to the upcoming release of the STELLAR 4 trial results for selonsertib, which I do not expect to be positive. Longer term, I am favorably inclined towards Gilead's multi-drug regimen studies, especially selonsertib with its FXR agonist. I maintain that appropriate NASH therapy will involve a combination of pharmaceuticals and that early stages of the disease will have a difficult time procuring reimbursement.

In conclusion, investors came into last week underinvested in the healthcare sector in light of December's stock market correction and concerns regarding January announcements. I remain positively inclined, given my long-term outlook that calls for an average annual 6% growth in US healthcare spending for the next decade. Those segments that should disproportionately benefit include immuno oncology, next-generation DNA sequencing, less invasive medical device technologies, diabetes management, and hepatology. Overall, I expect the healthcare sector to perform well in 2019 and that mergers in the pharmaceutical area will continue. My one caveat is that I believe that pharmaceutical companies have irreversibly opened up the can of worms on drug pricing, and this needs to be considered in the overall picture.

Disclosure: I am/we are long AMGN, GILD, REGN, CELG, BMY, MRK, CYRX, BLFS, TNDM. 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.