Prominent hedge fund manager James E. Flynn of the Deerfield Management fund has indicated a bullish outlook towards two controversial healthcare stocks in Q1 2017, according to the latest 13F forms filed with the SEC. Flynn opened new positions in specialty biopharma Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and flailing biotech Gilead Sciences, Inc. (NASDAQ:GILD).
James E. Flynn is the Managing Partner of the $7 billion healthcare-focused Deerfield fund- a role which he has held since 2005. He plays a pivotal role in overseeing Deerfield’s investment activities as well as the management of the firm. Since he took the top post, the firm says it has expanded its investment capabilities to include private structured financings, developed additional market research instruments and created the Deerfield Foundation for disadvantaged children. According to the fund, a proportion of all its profits are dedicated to this foundation.
With a career spanning nearly 30 years, Flynn previously worked as “a top ranked analyst” during his tenure at Furman Selz from 1996 to 2000 and as the Vice President of Corporate Development of a pharmaceutical company, Alpharma Inc. Even before this he was involved in the healthcare industry due to his work as a senior analyst covering the specialty pharmaceutical industry from 1988 to 1993. He holds a B.S. from the University of Michigan in Cellular and Molecular Biology and Economics and currently serves on the Board of Trustees of Continuum Health Partners.
Deerfield Management specializes in crafting finance options to help companies overcome the “myriad of financing challenges” in the healthcare sector. The company says it invests broadly in public healthcare securities irrespective of the company’s size or type of security- through an approach which it calls ‘collaboration, intellectual curiosity and pragmatism’. Indeed, the fund claims that its understanding of the sector enables it “to appreciate opportunity even when complex financial, legislative, regulatory and competitive pressures are present.”
Let’s now explore how this strategy played out in two key healthcare moves made by the fund in Q1:
Valeant Pharmaceuticals Intl Inc
In Q1, Flynn initiated a new position in VRX with the purchase of 1.5 million shares valued at $16.5 million, equivalent to 0.63% of the total portfolio.
Valeant, a Canada-based medical device company, has suffered a rough couple of years which saw its price decline by nearly 95%. However, like Flynn, Guggenheim’s Louise Chen believes that, with prices so depressed, now is actually the time to buy VRX stock. On June 16, she initiated coverage on VRX with a buy rating and an $18 price target which translates into an incredible 42% upside from the current share price. Chen says she believes that the stock will move higher under the new management team with “solid execution and future growth prospects”. Here are a few reasons why she believes the stock is set to improve:
One of the major challenges for VRX was its extraordinarily high $29 billion debt burden. However, the company has now started to actively reduce its debt through strategic divestitures and cash flow management. Chen says that the Street is overly obsessed about Valeant’s debt position, without fully taking into account the crucial fact that VRX is currently on track to reduce its total debt by $5 billion by 2018. Valeant already paid back $1.3 billion during the previous fiscal quarter. Furthermore, the sale of cancer-company Dendreon at the beginning of the year should help alleviate concerns about debt amortization- as should further upcoming divestures. Chen points out that the company’s assets have always generated “a good amount of cash” and that EBITDA at 40% is a very respectable figure- coming in higher than other companies in the sector.
Headline risks over the pricing scandal and government investigations are now reducing says Chen. As the dust settles, the company is beginning to stabilize the business and create new business objectives like strengthening the balance sheet, focusing on specialty markets and growth, improving leadership position and pipeline, and looking at efficient resource allocation. The current management- picked to take over after the pricing scandal- consists of Joe Papa, Paul Herendeen, and Bill Humphries, who have already proved their expertise in the growth of pharma business and have the skills to give VRX another lease of life.
Most importantly, the upcoming pipeline of nearly 50 products from VRX is expected to bring in $100MM sales this year, with a few of these products expected to bring in substantial future revenue. Despite the loss of exclusivity in certain key drugs, the recent approval of Siliq/Brodalumab has boosted investor confidence in the company. The drug is expected to be launched by the second half of 2017 and the impressive efficacy and low price point of the drug relative means that Siliq has the potential to become a blockbuster drug according to Chen.
Three other opportunities lie in the drugs Latanoprostene Bunod (intended for reducing intraocular pressure), IDP-118 (for plaque psoriasis), and Luminesse (which relieves redness of the eye). A higher revenue is also expected from Valeant’s gastrointestinal (GI) business from the second quarter.
However the Street in general is much more cautious on Valeant than Flynn or Chen. With 3 buy, 9 hold, and 3 sell ratings in the past three months, TipRanks shows that Valeant has an overall analyst consensus of Hold. The stock has an average price target of $15.09, which is a 19.19% upside from the last close.
Gilead Sciences, Inc.
For Q1, Flynn also initiated a position in Gilead with 1.2 million shares for $81.7 million, which translates into a relatively significant proportion of the portfolio at 3.15%.
With a huge $34 billion held in cash, California-based GILD could be in for an upcoming price surge despite its depressing fiscal 2017 results. This large cap biotech had been on a steady decline in the past few quarters due to the threat from generics on its profit-making HIV franchise and rapidly decreasing sales for its key hep-C franchise. Prices which were once at $120 are now at $64.
However, the market is now hoping that- at $64- the stock has finally bottomed and that prices will, at long last, begin to improve. Results revealed a 40% decline in hep C sales to just $2.6 billion- but the fact that prices did not crash after this is, in its own way, encouraging. The company reiterated guidelines for 2017 which is also good news and suggests that the 40% decline in the hep C sales is already factored into the current price point.
Looking ahead Gilead can either grow organically or through acquisitions. Organic growth is possible due to Gilead’s massive research budget. The company has a whopping $3.1-3.4 billion earmarked for research and development this year. At the same time, there are a number of exciting drugs in the pipeline although these are only due to come to market in the next couple of years at the earliest. Management also sound more bullish about making an acquisition- something which the market has been requesting for a long time now. At the same time, management has purchased at least $12 billion in Gilead stock over the last 16 months. Should the stock rise, Gilead could make a sweet profit from this stock load-up.
Unlike Valeant, Gilead has an overall analyst consensus rating of Strong Buy. According to TipRanks, the stock has received 10 buy and 2 hold ratings in the last three months. The average analyst price target on GIILD is $83.13, which presents a considerable upside of 29.65% from the last close price.