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Weekly Healthcare Pulse Summary

Core Content

This week's Weekly Healthcare Pulse provides an in-depth analysis of the healthcare sector's performance, investor sentiment, and upcoming earnings. The report highlights the sector's challenges and opportunities, with a focus on various subsectors such as major pharma, biotechnology, medtech, and managed care. The broader market context, including the impact of the S&P 500 and other industries, is also discussed.

Main Points

Sector Overview

• Generalist psychology toward the healthcare sector has been negatively impacted due to the collapse of consensus setups, with notable selloffs in stocks like ILMN and BIB.
• The healthcare sector as a whole has shown resilience, but uncertainty in other parts of the S&P, particularly in industrials and commodities, has affected investor confidence.
• July is historically a challenging month for healthcare outperformance, though there are expectations for improvement in August.

Subsector Highlights

Major Pharma/Generics - Jami Rubin

• BMY reported a 2Q beat and raised 2015 guidance, though skepticism remains due to increased investment spend.
• LLY posted a 2Q beat but mixed reactions to its Alz. sola study update.
• ABBV faced weak OUS Humira sales, but management reaffirmed growth guidance.
• Earnings next week: PFE, MRK, TEVA, and BXLT are expected to drive market debate.

Biotechnology - Terence Flynn, Ph.D.

• BIIB reported weak 2Q revenues and lowered 2015 guidance, which surprised investors.
• REGN/SNY received a positive EU decision for their PCSK9 drug, Praluent, which may influence AMGN's Repatha.
• GILD and UTHR are likely to be focal points, with GILD expected to beat on ex-US hepC and UTHR on base business growth.

Specialty and SMID Pharma – Gary Nachman

• VRX reported a strong beat and guidance raise, showing strong execution.
• ANAC was upgraded to Buy, with expectations for continued outperformance.
• PCRX is a lagging name, with concerns over Exparel demand and a high short interest (SI now 15% of float).
• Earnings next week: PCRX is expected to generate volatility, with MCK and HOLX as potential positives.

European Pharma - Keyur Parekh

• EU Pharma had mixed 2Q results, with Novartis and Shire disappointing due to FX and cost issues.
• Roche reported strong results.
• Earnings next week: GSK, Bayer, AstraZeneca, and Sanofi are expected to provide insights.

MedTech - David Roman

• Medtech outperformed the XLV and SPX, with a new "normal" growth rate of over 5%.
• Companies like ABT, BCR, STJ, and SYK posted 6-8% organic growth.
• Staples trades at ~21x for 3-5% growth, compared to medtech at 18x, suggesting potential for further outperformance.
• Earnings next week: Positive trends are expected to continue.

Life Science Tools/Diagnostics/Labs - Isaac Ro

• TMO and DHR posted strong reports, while ILMN and CPHD underperformed.
• DGX reported stagnant volumes but better-than-expected pricing, which bodes well for LH.
• CPHD guidance was viewed as disappointing, but the magnitude of the sell-off was unexpected.

Managed Care - Matthew Borsch, CFA

• ANTM and CI announced a merger, which caused market uncertainty.
• UNH raised questions about utilization trends.
• Earnings next week: ANTM, HUM, and MGLN will be key.

Providers - Matthew Borsch, CFA

• ADPT beat expectations and raised guidance, showing confidence in long-term growth.
• EXAM was downgraded to Sell due to concerns about growth trajectory.
• THC was reinstated at Neutral due to integration and leverage concerns.

Investment Grade Healthcare – Uche Kanu, Ph.D.

• The HC sector outperformed the overall IG corporate market, with increased issuance and spread widening.
• UnitedHealth issued an $10.5bn bond offering related to its $12.8bn acquisition of Catamaran.
• Anthem agreed to acquire Cigna in a $54.2bn deal expected to close in 2H16.

High Yield Healthcare – Cindy Guan, CFA

• HC bonds outperformed the overall HY market, which experienced a decline due to commodities weakness.
• VRX was a notable outperformer, with its benchmark bond rallying.
• Cash flows remain weak, but the company expects improvement as one-time items wind down.

Key Information

• Market Sentiment: The sector has faced a significant selloff due to the collapse of consensus setups and regulatory uncertainty.
• M&A Activity: Several M&A announcements have been made, including St. Jude acquiring Thoratec and Anthem acquiring Cigna.
• Investor Interest: There is growing interest in medtech, with a potential for more M&A activity.
• Earnings Outlook: The week ahead is expected to be highly active, with several companies reporting and generating market debate.
• Valuation Trends: The healthcare sector remains attractive, with some companies trading at lower multiples compared to other sectors.

Week Ahead Earnings Calendar

• July 27, 2015: HAE, CNC, EW, EXAM, ICLR, LH, MRK, NUVA, OMI, PFE, UTHR, WAT
• July 28, 2015: ESRX, FMI, GILD, ENDp, HSIC, HSP, HUM
• July 29, 2015: MCK, BAX, BXLT, HUM

Conviction List

Summary of Earnings Performance

• Healthcare sector had a mixed 2Q, with 56 companies reporting and 88% of them beating estimates.
• Biotechnology had the best performance with 100% of companies beating estimates.
• Pharmaceuticals had a mixed performance with 75% beating estimates.
• Health Care Distributors had 100% of companies beating estimates.
• Health Care Equipment had 100% of companies beating estimates.
• Life Sciences Tools & Services had 100% of companies beating estimates.
• Managed Health Care had 100% of companies beating estimates.

Conclusion

The healthcare sector is navigating a complex environment with mixed earnings and M&A activity. While the sector has faced challenges, there are still opportunities in medtech and specialty pharma. The upcoming earnings calendar is expected to provide further clarity on the sector's direction.