巴克莱-美股-医疗保健行业-美国生命科学与诊断：巴克莱医疗会议上关于工具与诊断的十大争论-2019.3.5-45页.pdf

Equity Research 5 March 2019 CORE Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 37.Restricted-Internal U.S.Life Science Tools&Diagnostics Top 10 Tools&Dx Debates for the Barclays Healthcare Conference Next week,we are hosting the Barclays Global Healthcare Conference in Miami Beach,FL.Were expecting healthy investor debates amongst our participating companies,including Life Science Tools:BRKR,ILMN,MTD,PKI,RGEN,TECH,&TMO;Diagnostics:EXAS,HOLX,LMNX,OXFD,QDEL,&QGEN;and Labs/CROs/CDMOs:CTLT,CRL,DGX,ICLR,IQV,&LH.The Top 10 Tools&Dx debates we see include:1)How durable is the biopharmaceutical end market for Life Science Tools and the CROs?We believe biopharma is a sustainable growth engine for the Life Science Tools&CROs,driven by higher levels of new drug approvals and ample access to funding.Additionally,we believe Thermo Fishers unique biopharma assets are well positioned to benefit from the shift toward development of personalized therapies.Jacks Job Board:After two years of healthy new awards,we continue to see an acceleration in the number of CRO employees being hired-with IQVIA standing out vs peers.2)Are data strategies driving share shifts among CROs?As several CROs develop“Next Generation”platforms for clinical development,the debate is around if and when data offerings will transition from being a“nice to have”to a“need to have”.IQVIAs strong new business wins raise questions around whether the transition is approaching.3)How durable is growth in the China end market?Strong regional growth supports the argument that support for life science research is durable,though concerns persist.4)What is driving contrasting diagnostic strength relative to the clinical lab pressure?Weve been perplexed at contrasting results between the labs and diagnostic manufacturers.For Dx,the risk is reimbursement reductions bleed through over time.5)Can the national labs cut enough costs to offset pricing pressure in 2019?Significant rate headwinds increase focus on operational improvements to hit guidance.6)When will clinical lab consolidation accelerate?We believe the confluence of lab industry pressures should have an outsized impact on regional and hospital-based labs.The key question is timing,following a slower year of deal-making in 2018.7)Is the industry primed for increased M&A?2018 was a slow year for acquisitions by any measure.Looking to 2019,we believe there is a case to be made for increased activity,given the fragmented landscape and clear opportunities for consolidation.8)What is the next hot life science tool or diagnostic?We view an accelerated pace of innovation as an investment positive for the entire group.9)Which company is best positioned for a downturn?We believe our coverage is more recession-proof than the broader market.The national labs screen as the most defensive area,followed by the CROs,then Diagnostics and Life Science Tools.10)Are Life Science Tools approaching peak positive sentiment?The group is now trading at close to all-time highs.We believe the biggest fundamental risk is around the Industrial end market where macro datapoints have moderated.Actions:We raise our TMO PT($295,up from$280)and IQV($160,up from$155).INDUSTRY UPDATE U.S.Life Science Tools&Diagnostics NEUTRAL Unchanged For a full list of our ratings,price target and earnings changes in this report,please see table on page 2.U.S.Life Science Tools&Diagnostics Jack Meehan,CFA+1 212 526 3909 BCI,US Mitchell Petersen+1 212 526 3367 BCI,US Andrew Wald+1 212 526 9436 BCI,US Barclays|U.S.Life Science Tools&Diagnostics 5 March 2019 2 Summary of our Ratings,Price Targets and Earnings Changes in this Report(all changes are shown in bold)Company Rating Price Price Target EPS FY1(E)EPS FY2(E)Old New 01-Mar-19 Old New%Chg Old New%Chg Old New%Chg U.S.Life Science Tools&Diagnostics Neu Neu IQVIA(IQV)OW OW 143.35 155.00 160.00 3 6.30 6.30-7.25 7.25-Thermo Fisher Scientific,Inc.(TMO)OW OW 264.06 280.00 295.00 5 12.15 12.15-13.75 13.75-Source:Barclays Research.Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estimates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight;UW:Underweight;RS:Rating Suspended Industry View:Pos:Positive;Neu:Neutral;Neg:Negative Barclays|U.S.Life Science Tools&Diagnostics 5 March 2019 3 CONTENTS 1)HOW DURABLE IS THE BIOPHARMACEUTICAL END MARKET FOR LIFE SCIENCE TOOLS AND THE CROS?.4 Jacks Job Board-CROs:Hiring Continues to Accelerate.7 2)ARE DATA STRATEGIES DRIVING SHARE SHIFTS AMONG CROS?11 3)HOW DURABLE IS GROWTH IN THE CHINA END MARKET?.13 4)WHAT IS DRIVING CONTRASTING DIAGNOSTICS STRENGTH RELATIVE TO CLINICAL LAB WEAKNESS?.16 5)CAN THE NATIONAL LABS CUT ENOUGH COSTS TO OFFSET PRICING PRESSURE IN 2019?.17 6)WHEN WILL CLINICAL LAB CONSOLIDATION ACCELERATE?.18 7)IS THE INDUSTRY PRIMED FOR INCREASED M&A?.21 8)WHAT IS THE NEXT HOT LIFE SCIENCE TOOL OR DIAGNOSTIC?24 9)WHICH COMPANY IS BEST POSITIONED FOR A DOWNTURN?.25 10)ARE LIFE SCIENCE TOOLS APPROACHING PEAK POSITIVE SENTIMENT?.29 ACTIONS:RAISE PT ON THERMO FISHER TO$295,IQVIA TO$160 33 Barclays|U.S.Life Science Tools&Diagnostics 5 March 2019 4 1)HOW DURABLE IS THE BIOPHARMACEUTICAL END MARKET FOR LIFE SCIENCE TOOLS AND THE CROS?Given the importance of the biopharma end market for our coverage,the sustainability of its growth remains a critical debate.While we believe investors often view this end market as cyclical in nature,our view is that growth is more sustainable than the market thinks.Amidst a more uncertain macro environment,we expect the biopharma end market to remain resilient relative to other end markets,and to continue as a growth driver for our coverage.There are a number of factors that improve our conviction into this dynamic:1)breakthroughs in science are allowing for completely new classes of drugs to succeed,2)good science,combined with an accommodative FDA,are driving new drug approvals to record levels,which should support future investment,3)capital markets activity is creating a robust funding environment,and 4)patent cliffs are driving investments by larger biopharma companies as they aim to refresh drug pipelines.Simply put,we believe the level of innovation that exists currently is unprecedented,creating a sustainable growth engine for the Life Science Tools&CROs.Innovative new drug mechanisms(i.e.cell and gene therapies)are enabling treatments that werent possible previously.In an FDA statement from January 2019,the agency noted that it expects to receive 200 cell and gene therapy INDs annually by 2020,and by 2025 it expects 10 to 20 approvals per year.Additionally,recent breakthroughs in genomic and phonemic sciences,made possible by technological developments,have allowed scientists to develop a more specialized view of individualized patient responses to disease treatments.For example,advancements in next-generation sequencing(NGS)have made it significantly more cost efficient to sequence the human genome.This is enabling significant levels of data collection,leading researchers to gain a better understanding of human disease.While these advancements lead to new R&D breakthroughs,they also make R&D more efficient,as leveraging genetics to inform selection of drug targets can improve success rates.FIGURE 1 Barclays Estimates for Gigabases(Gb)Sequenced FIGURE 2 Clinical Trial Patient Mix:Oncology Represents an Increasing Portion of Trial Participants Source:Company Documents,Barclays Research Source:clinicaltrials.gov,Barclays Research Data as of 12/31/2018 We believe higher levels of new drug approvals are supportive of future R&D investment.Approved drugs create profits for the industry,which can ultimately be used to drive sales(creating a manufacturing opportunity for the Life Science Tools)or invest in the 0200,000400,000600,000800,0001,000,0001,200,000Gb Total(K)Gb Cumulative(K)10%11%10%10%14%11%14%17%16%19%20%9%10%10%8%9%12%9%3%5%6%9%7%6%11%5%6%10%6%4%3%7%4%74%72%69%77%71%67%71%76%76%68%67%0%10%20%30%40%50%60%70%80%90%100%CancerCardioDiabetesOtherFor the full FDA statement,see here Barclays|U.S.Life Science Tools&Diagnostics 5 March 2019 5 development of new therapies.We believe greater approval rates are due to a combination of more successful(and targeted)therapies as well as a more accommodative FDA.In 2018,59 novel drugs were approved by the FDA(up 28%y/y),representing a record for the industry.FIGURE 3 CDER First Action Approval Rates FIGURE 4 FDA Novel Drug Approvals Continue to Accelerate Source:FDA Note:As of 11/30/2018 Source:FDA,Barclays Research Data as of 12/31/2018 Strong access to funding through the capital markets has spurred R&D investments by SMiD biopharma companies.As described above,these companies are capitalizing on scientific advancements allowing for the treatment of new,more targeted indications,often with new mechanisms(i.e.cell or gene therapies).With improved funding,this class of biopharma companies is helping to buoy end market demand.That said,given the heightened volatility in the equity markets recently,it will be important to monitor the resulting impact on access to cash through the capital markets.2018 was a record year for biopharma IPOs,which we believe supports near-to mid-term investment.In light of market volatility,IPO activity still remained strong in 4Q18,with total deal values$1.4 billion,up 19%from 4Q17.As a result of elevated capital markets activity in recent years(2013-2018),aggregate cash levels for the 30 SMiD biopharma companies in our tracker remain at all-time highs.45%52%52%46%43%56%70%72%78%89%77%71%91%0%10%20%30%40%50%60%70%80%90%100%CDER NME NDAs/BLAs2566524236666211127121625 191115311818162120152433253033153443263022263238263534362341413641354357430102030405060BLA ApprovalsNDA ApprovalsFilingsBarclays|U.S.Life Science Tools&Diagnostics 5 March 2019 6 FIGURE 5 Biopharma IPO Activity:Robust 2018 Funding($Bn)FIGURE 6 Barclays Cash Tracker:SMiD Biotech Funding($Bn)Source:Bloomberg,Barclays Research Note:As of 12/31/2018 Source:Company Documents,Barclays Research Revenue associated with drugs coming off patent is expected to ramp significantly in 2022 and 2023,which we believe should catalyze R&D investments by larger biopharma companies.In 2022 and 2023,EvaluatePharma estimates that$41 billion(4%of the market)and$67 billion(6%)of drug revenues will go off patent,respectively.A side effect of this dynamic could be a step-up in biopharma M&A,which will be an important risk to monitor.FIGURE 7 Patent Expirations:Worldwide Revenue at Risk($Bn)Source:EvaluatePharma(http:/ Research$0.8$0.5$0.9$3.2$4.5$3.7$1.4$2.9$5.8$0$1$2$3$4$5$6$7201020112012201320142015201620172018$Bn$2.5$2.2$3.0$4.7$7.3$10.3$10.1$12.7$14.6-20%-10%0%10%20%30%40%50%60%70%$0$2$4$6$8$10$12$14$16 SMID Biotech CashY/Y Growth$29$34$52$31$31$51$39$32$39$43$17$17$41$67$27 4%5%7%4%4%7%5%4%5%5%2%2%4%6%2%0%1%2%3%4%5%6%7%8%$0$10$20$30$40$50$60$70$80 201020112012201320142015201620172018201920202021202220232024%of Market at RiskWW Sales at Risk($Bn)Total Revenue at Risk%of Market at RiskBarclays|U.S.Life Science Tools&Diagnostics 5 March 2019 7 While the trends mentioned above are driving growth for the biopharma end market as a whole,an outsized portion of this growth is coming from the development of large molecule drugs.The innovative new therapies described above often use biologic material,such as monoclonal antibodies(mAb),viruses,or live cells,as the crux of the therapeutic.Innovation in these areas is driving faster market growth rates for biologics,and the tools-intensive nature of the manufacturing process further supports growth and barriers to entry.In our coverage,we believe Thermo Fishers unique biopharma assets are well-positioned to benefit from these trends.Given the importance of the manufacturing process,supplier agreements tend to be more direct and made at higher levels of the organization,where the company has the opportunity to leverage industry-leading customer relationships.FIGURE 8 WW Sales Growth:Biotech vs Conventional Drugs FIGURE 9 WW Split of Biopharma Sales:Biotech vs Conventional Drugs Source:EvaluatePharma(http:/ Research Source:EvaluatePharma(http:/ Research Jacks Job Board-CROs:Hiring Continues to Accelerate In our view,hiring trends with the CROs support the near-term growth outlook for the biopharma end market.As background,the goal of Jacks Job Board is to monitor hiring activity for our coverage universe.We believe this real-time read can help us stay at the forefront of monitoring new growth prospects for our coverage,as well as aid in the identification of potential turnover risks.We have been web-scraping the careers page on the website of each of our covered companies since April 2018.All of the data is publicly available online.We collect roughly 15K careers records each month,and have amassed 150K records since kicking off the initiative.Our goal is to publish updates periodically as emerging trends drive a fundamental thesis.We do not intend to publish all of the data routinely-only as we identify trends that drive a fundamental thesis.For our CRO coverage,we continue to see an increase in the number of employees being hired over the last year.After two years of healthy new business awards,we believe the CROs are approaching an inflection where revenue can begin to accelerate.As shown below,our CRO coverage has generally posted healthy new business awards since early 2017.That said,revenue burn rates have moderated driven by significant cancellation activity in 2H16,coupled with a mix shift toward longer duration trials in oncology&CNS.We think the recent acceleration in hiring of employees is intriguing,given the CRO business model would demand additional hiring as work begins to scale into revenue generation.We ultimately wish we had longer historical data,and will-6%-4%-2%0%2%4%6%8%10%12%Growth Y/YBiotechnologyConventional/Unclassified0%10%20%30%40%50%60%70%80%90%100%BiotechnologyConventional/UnclassifiedFor more details on Thermo Fishers differentiated biopharma exposure,please see pages 264-268 of our 2019 Outlook from January 3,2019:“2019 Outlook:Tools&Dx a Relative Safe Haven,TMO Our New Top Pick”Please see our initial Jacks Job Board publication from 1/3/2019,“Tools&Diagnostics:2019 Outlook:Tools&Dx a Relative Safe Haven”Barclays|U.S.Life Science Tools&Diagnostics 5 March 2019 8 continue to monitor this trend closely.From a company perspective,IQVIAs hiring stands out versus peers-which mirrors IQVIAs healthy new business win