Dr. Richard Evans

One of the generic companies that focuses on the top of the market. They tend to have the newer generics. The bad news is that they are selling in the US to 3 joint ventures. The wholesalers and retailers got together to form joint ventures which controls 80% of generics, so they get much lower selling prices. The trick is to be very efficient in manufacturing, to be able to meet the bids as well as being early in launching drugs that have just gone off patent. A tougher game to play than it used to be. Operationally, the company historically has been very good. It has sold off, and is reasonably attractive.

They’ve had great success in their drug for lung cancer. Lung cancer is about a 5^th of the demand for immuno ecology agents, but the balance of the market is 4X larger and consists of many indications. If you look at who is in the lead, it is more often Bristol-Myers (BMY-N) than this company. Merck had incorrectly been left behind on valuation, but that has now been lifted. Capital markets are looking at who wins and who loses in immunology as an absolute, but that is not the case, it is going to be a balance between the 2. This is a fine company and the valuation is reasonable, but he would rather be with Bristol-Myers. (See Top Picks.)

A very well-managed company with a very solid footing. Valuation is reasonable and certainly belongs in a portfolio. It is more of a stabilizer rather than a driver of volatility. In the last couple of days, there has been some concern when guidance came in the little bit lower. He wouldn’t be surprised to see them make some acquisitions in 2017. 2.9% dividend yield.

If you look at their operating economics, they are very much like a large Pharmaceutical company. Relatively slow moving. Their rate of innovation and patent expiration on all products kind of match, so there is not a lot of upside. The growth that has occurred, much of it on a trailing basis, has come from rising prices on their rheumatoid arthritis drug, but will no longer be able to do that. His belief is that prices are coming down.

Very focused on cardiovascular and ICU. The great thing about this is that the demand is very inelastic, so you get the unit demand independent of the economic cycle, a good solid demand. Also, they are innovators and have good research and good product flow on their own and have been smart acquirers.

Marijuana? Big Pharma is not interested in owning these companies. However, some of the middle cap or smaller cap companies would be absolutely interested in these. What you really need, in order for this to happen, is that regulations need to be homogenized state-by-state, as well as dealing with some of the banking problems.

Considers this as a commercial predominant HMO. Most of the lives on this are going to be sponsored by an employer. A fine business. Typically, over time they run on a medical loss ratio, so tend to run over time on the percentage of premiums that come in that are paid out as claims. As Republicans unveil what they want to do in order to replace Obama care, he thinks you will see some issues emerging that threaten some of the companies that take most of their premiums from employers, that is a long-term concern. In the meantime, this should do reasonably well.

Healthcare. He is really focused on pharmaceuticals at the moment, which is about 52% of the capitalization in the healthcare space. Coming into the US election, there is a lot of displacement; a lot of concern about new legislation, new regulation, and particularly the potential impact on drug pricing. If you unpack that a little and look at how these companies go from year to year creating growth and earnings, a very big percentage of it is just US-based pricing powers, the same basket of pharmaceuticals, but just inflating the underlying price. There is a fear that that capability is going to be lost, which would have a huge effect on earnings. The market has set aside the bio-pharma sector saying there is a big risk that it is going to be fundamentally altered by legislation, but he doesn’t see it happening that way. Thinks any legislative or regulatory risk will be rifle shots as opposed to a wet blanket on the whole sector. That gives us a large sector that is really fundamentally re-rated, some of whom will maintain their pricing power through this election cycle, and those are the stocks he is most interested in at the moment.

On valuation, it is really not that exciting. Not cheap nor expensive. The key moving part that creates concern is long-acting insulin pricing in the US. Up until 18-24 months ago, they and Santa Fe (?) were in kind of a cooperative duopoly and inflating prices and did about a 20% gain in one year. The insurers finally had enough, and instead of covering both drugs, they would throw it off to whoever gave the lowest bid. It is not clear where this is going to really end. Until this is decided, there is just no reason to catch a falling knife.

Drug retail in the US is in a very tough spot. Looking at the number of pharmacies needed versus how many you’ve actually got, you have 34% more than needed. There are so many pharmacies, and margins have gotten so large in pharmacies that insurers are now coming into a geographic area and getting lower bids on their dispensing margins. He sees a steady, annual re-rating of gross profits in pharmacies, and the dispensing margins staying under pressure. Valuations are not very attractive at the current time.

Very well-managed company. They have some very good in-line products and have been building up the sales force. Has a nice, promotionally responsive product portfolio and are adding salesforce to that, which is typically a good equation. The one risk was the Actavis (ACTA-Q) component, but once they became a part of this company, their behaviour calmed down.