This week we continue on to the final in the pharma series by looking at specific companies that we feel are worth at least a review by investors. As elucidated last time, the categories that offer the most lucrative long-term opportunities are Oncology, Diabetes and Cardiovascular. It is with this in mind that we look at prominent or interesting players, they are DexCom, Bristol-Meyers Squibb, Moderna and Fate Therepeutics. The last two we shall leave for next week given the complexity of the issues on hand and the nuance required in explanation.
To sum up DexCom, the company is in the business of glucose monitoring for diabetes. A certainly lucrative market that places it front and centre in a tremendous growth category. For those that read last week, this is potentially the biggest growth category in both emerging and developed markets. So, what is the problem that the company seeks to solve?
At the risk of sounding overly simplistic, one of the biggest issues for diabetics is the ability to consistently monitor glucose levels. Traditional processes included metering (i.e. many may be familiar with strip metering), a rather ineffective process that relies on individuals to constantly stop and use test kits (using needles to prick). DexCom’s CGM (Continuous Glucose Monitoring) system is a small wearable device that sends continuous readings to a user’s smartphone.
This may be one way for investors to gain access to a growing and lucrative healthcare market while having the same advantageous characteristics of technology companies (i.e. sticky revenues). The business relies on every consumer that signs up buying higher-margin consumables for years to come, much the same way as Apple creates an ecosystem for its own products. The flipside however is that sensor technology, although the company is a first entrant and has rapidly updated its tech, faces increased competition and is not protected in the same way as Neuren, for example, with its own pharmaceuticals. What is also important to note is that DexCom’s product is consumable and has to be replaced within a period of 10 days. After this users would be required to buy again at a cost of US $349 per box (three units per box). Here we have to remember how heavily subsidised the consumers are in this space). In a way, this is effectively recurring revenue in.
So, why does this make sense?
Aside from its revenue model, DexCom continues to grow at an exponential pace. Seemingly unaffected by the ebbs and flows of Covid-19, quarterly revenues growing 30% Y-o-Y and the firm maintaining its market leadership in both accuracy and usability despite competition from industry giants such as Abbott’s (ABT.NYSE) FreeStyle Libre, which we might add is more competitively priced, and Medtronic (MDT.NYSE). On the latter, Medtronic’s own insulin pump offers an integrated CGM in conjunction with its insulin delivery. However, the fact that the company continues to retain customers and increase market share is rather telling. Moreover, its collaboration model with companies such as Tandem (for insulin release) makes it more flexible than those with a more diverse revenue model, such as Medtronic.
Getting to the numbers; revenues up 30%, US revenue continues to grow at 20% while it has recently expanded into further growth markets where sustained increases of 35% are on the table. We project this to continue to grow at 35% this calendar year (above managements own guidance of 15-20%). More attractively, Gross Margins continue to run at circa. 69%. Assuming this to be correct and using a 5-year forecast period, revenue should grow from circa. US $1.9bn currently to $8.5bn. DexCom’s continued expansion into the G7 nations and smaller European countries bodes well for the future.
Red Flags & Risks: The biggest risk remains its current valuation at a P/E of 109. Nevertheless, for the growth investor the important metric to consider is potentially the Price to Sales which remains 19.46 (still a premia especially when compared to traditional competitors like Abbott or Medtronic).
Price Target over a 5-year period: US $1,500 per share (currently trading at ~$600). Assuming discount rate of 3%.
Bristol Myers Squibb (BMY.NYSE)
From a high growth, high P/E company we move onto one of the largest pharmas on the planet. Many may already be aware of the Bristol Myers Squibb (or BMS), given the company’s more than 100-year history. The good, including Presidents Clinton’s accolades and culmination in the award of the National Medal for Technology, to the not so good in the early 2000s where it was accused of maintaining a monopoly of its cancer drug Taxol (Paclitaxel), a vital prescription in the treatment of a number of cancers, from breast to cervical. It has also been an unfortunate addition to many investors’ portfolios in recent years.
So, why now?
In answering that question, let us begin with why investors have seemingly discounted the business. As is perhaps rather evident from the mention of monopoly in Taxol, BMS plays across all the segments that we feel rather bullish on, most importantly oncology and cardiovascular. What investors have seemingly focused on (and discounted) to date has been the loss of major patents across its major portfolios over the next decade, including its blockbuster oncology treatments Revlimid, Sprycel, Pomalyst and the all important immunology play Orencia. These four make up 50% of all sales. The market also continues to be rather unimpressed with its largest acquisition to date, Celgene, at a rather hefty price tag of US $74bn (to put that in context, current market cap is circa. US $128bn). We, however, see this as a crucial piece in further expanding BMS’ oncology footprint, Celgene focusing and well entrenched in blood cancer. A more recent acquisition is Medarax, for another US $2.4bn, which again cements its footprint in cancer immunotherapy (for which it remains a first-mover).
This brings us to our first point, we feel that the business has made rather astute acquisitions that should cement BMS’ leadership positions in oncology, despite the market seemingly unimpressed with the positions. Moreover, BMS also has a partnership with Pfizer (another favourite we previously wrote on) in the cardiovascular category. Aside from this point, the market continues to be seemingly unaware or at the very least discounting several new drugs in the pipeline that we believe should make up for the gradual decline in other categories as patents expire. This includes things like Zeposia (used to treat relapsing forms of multiple sclerosis) and Breyanzi (CAR-T cancer drugs i.e. immunotherapy). These drugs bring us to the second point, the business seems to be focused on higher margin/lower volume products, which we continue to love.
For those more interested in the upside, the business continues to focus on late-stage pipeline to do with cardiovascular and cancer drugs to replace and effectively be upgrades on the expiring patents. This suggests to us that the market may have this business wrong in its assumptions. We forecast that the potential earnings of new releases and upside of late-stage pipeline should more than compensate for the expected decline in earnings as a result of patent expiration.
Red Flags & Risks: As a rule of thumb, we prefer organic growth to M&A and BMS has accumulated total debt of approximately US $51.67bn (though it has been seeking to pay it down). This requires management to be almost perfect in implementation and commercialisation of its late stage pipeline for our own undervalue thesis to play out.
Price Target over a 5-year period: US $95 per share, assuming sales continue to hold up with the addition of new drugs. We expect Reblozyl and mavacamten to support an additional US $3.8bn in annual sales at peak.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.