Leading Independent Investment Research, Morningstar, Inc.

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Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

<div class="content-highlight"><h2>The potential for Merck and Roche looks underappreciated.</h2></div><hr>Innovation in immuno-oncology drugs has supported the moats for <a href="https://www.smartkarma.com/entities/merck-co-inc" target="_blank" data-smartkarma-citation="entities:1130:1">Merck &amp; Co Inc. (MRK US)</a>, <a href="https://www.smartkarma.com/entities/roche-holding-ltd" target="_blank" data-smartkarma-citation="entities:976:1">Roche Holding Ltd (ROG VX)</a>, <a href="https://www.smartkarma.com/entities/bristol-myers-squibb-co" target="_blank" data-smartkarma-citation="entities:1133:1">Bristol Myers Squibb Co (BMY US)</a>, and <a href="https://www.smartkarma.com/entities/astrazeneca-plc" target="_blank" data-smartkarma-citation="entities:21824:1">AstraZeneca PLC (AZN LN)</a>, and we expect expansion into the adjuvant/neoadjuvant settings to strengthen these moats. We project the lung adjuvant/neoadjuvant market to expand the potential by close to $10 billion in annual sales (not probability-weighted) by 2027, adding to almost $40 billion projected in the latestage metastatic settings. We estimate an 85% probability of success in this early-treatment setting based on early clinical data and the strength of the drugs in the late-stage setting. We view Merck and Roche as best positioned in the adjuvant setting due to a first-mover advantage with upcoming clinical data in 2020-21. While Bristol and Astra have earlier data in 2020 in the neoadjuvant setting, we are skeptical that these neoadjuvant studies without combination adjuvant chemotherapy will show strong enough efficacy to be competitive. Overall, including both early- and late-stage settings, we believe the potential of immuno-oncology drug sales is most underappreciated for Merck and Roche, and we see both of these companies as undervalued.<hr><h2>Key Points</h2><ul>
<li>Merck's and Roche's potential in immuno-oncology looks underappreciated versus consensus expectations, and the addition of the adjuvant lung potential strengthens the firms' positioning.</li>
<li>We estimate the lung neoadjuvant/adjuvant market share for Merck (35%), Roche (35%), AstraZeneca (15%), and Bristol-Myers (15%) based on timing and design of clinical studies, early-stage study results, and data in the metastatic disease setting.</li>
<li>Successful studies in neoadjuvant lung, nonresectable stage III lung (early but not as early as neoadjuvant and adjuvant), and adjuvant melanoma support an 85% probability of adding neoadjuvant and adjuvant lung cancer indications to the leading PD-1/PD-L1 drugs.</li>
<li>Data at ASCO 2019 strengthens the outlook for neoadjuvant/adjuvant treatment with a PD-1/PD-L1 drug, with Bristol's combination of Yervoy and Opdivo showing a stronger major pathological response rate (33%) than the historical trend seen with chemotherapy (27%) in the neoadjuvant setting.</li>
</ul>

The potential for Merck and Roche looks underappreciated.Innovation in immuno-oncology drugs has supported the moats for Merck &amp; Co Inc. (MRK US), Roche Holding Ltd (ROG VX), Bristol Myers Squibb Co (BMY US), and AstraZeneca PLC (AZN LN), and we expect expansion into the adjuvant/neoadjuvant settings to strengthen these moats. We project the lung adjuvant/neoadjuvant market to expand the potential by close to $10 billion in annual sales (not probability-weighted) by 2027, adding to almost $40 billion projected in the latestage metastatic settings. We estimate an 85% probability of success in this early-treatment setting based on early clinical data and the strength of the drugs in the late-stage setting. We view Merck and Roche as best positioned in the adjuvant setting due to a first-mover advantage with upcoming clinical data in 2020-21. While Bristol and Astra have earlier data in 2020 in the neoadjuvant setting, we are skeptical that these neoadjuvant studies without combination adjuvant chemotherapy will show strong enough efficacy to be competitive. Overall, including both early- and late-stage settings, we believe the potential of immuno-oncology drug sales is most underappreciated for Merck and Roche, and we see both of these companies as undervalued.Key Points
Merck's and Roche's potential in immuno-oncology looks underappreciated versus consensus expectations, and the addition of the adjuvant lung potential strengthens the firms' positioning.
We estimate the lung neoadjuvant/adjuvant market share for Merck (35%), Roche (35%), AstraZeneca (15%), and Bristol-Myers (15%) based on timing and design of clinical studies, early-stage study results, and data in the metastatic disease setting.
Successful studies in neoadjuvant lung, nonresectable stage III lung (early but not as early as neoadjuvant and adjuvant), and adjuvant melanoma support an 85% probability of adding neoadjuvant and adjuvant lung cancer indications to the leading PD-1/PD-L1 drugs.
Data at ASCO 2019 strengthens the outlook for neoadjuvant/adjuvant treatment with a PD-1/PD-L1 drug, with Bristol's combination of Yervoy and Opdivo showing a stronger major pathological response rate (33%) than the historical trend seen with chemotherapy (27%) in the neoadjuvant setting.


Immuno-Oncology Drugs in Adjuvant Lung: The Next Frontier in Strengthening Moats

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/728/original/2019-03-02_20-40-55.png?1551526871" class="editor-image img-responsive" data-smartkarma-image-id="80728"></figure>Source: Japan Analytics
</div>LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/722/original/2019-03-02_18-02-59.png?1551517390" class="editor-image img-responsive" data-smartkarma-image-id="80722"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/724/original/2019-03-02_18-07-56.png?1551517689" class="editor-image img-responsive" data-smartkarma-image-id="80724"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/729/original/2019-03-02_20-41-51.png?1551526925" class="editor-image img-responsive" data-smartkarma-image-id="80729"></figure><div class="content-caption">Source: Japan Analytics</div>HOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/10020" target="_blank" data-smartkarma-citation="entities:10020:1">Sakai Moving Service (9039 JP)</a>, <a href="https://www.smartkarma.com/entities/20269" target="_blank" data-smartkarma-citation="entities:20269:1">Sumitomo Chemical (4005 JP)</a>, <a href="https://www.smartkarma.com/entities/8431" target="_blank" data-smartkarma-citation="entities:8431:1">Parco (8251 JP)</a>, <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>, <a href="https://www.smartkarma.com/entities/14674" target="_blank" data-smartkarma-citation="entities:14674:1">Nichias (5393 JP)</a>, <a href="https://www.smartkarma.com/entities/27043" target="_blank" data-smartkarma-citation="entities:27043:1">Raksul (4384 JP)</a>, <a href="https://www.smartkarma.com/entities/10503" target="_blank" data-smartkarma-citation="entities:10503:1">Daito Trust (1878 JP)</a>, and <a href="https://www.smartkarma.com/entities/14502" target="_blank" data-smartkarma-citation="entities:14502:1">Benefit One (2412 JP)</a>.


Source: Japan Analytics
LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the strongest in over two years, and much of this 'boom' is flowing into risk assets. Large-scale repatriation of offshore funds by US companies has also helped boost the US dollar against the yen. The Market Composite responded by rising 2.3% over the last two weeks, although only by 1% in US dollar terms.WEAK MACRO - Net exports and higher inventories offset private investment and consumption during the fourth quarter, resulting in flat GDP growth year-on-year. January industrial production fell to the lowest level in 30 months, and, with the manufacturing PMI nearing 50, the prospect is for further weakness this quarter. Inventories continue to rise and, in North Asia, to levels last seen in 2005. Combined with the sharp fall in exports in Japan, Korea and Taiwan, export pricing in back in deflationary territory, putting further upward pressure on real interest rates.  Meanwhile, January retail sales saw the largest month-on-month decline in over three years as department stores saw fewer Chinese tourists over the New Year.  Equity markets are living on 'borrowed time'.  Source: Japan AnalyticsHOLD FOR NOW - This bear market rally is two months old and is maturing. The Value Traded ratio is below trend again, the RSI is neutral, and the Toraku is signalling caution. We expect another month of liquidity/weak Yen-driven strength before the economic realities begin to prevail.MARKET/SECTOR STRATEGY- We continue to recommend an underweight position in Japan in global portfolios and favour undervalued domestically-orientated companies in the Information Technology, Internet, Media, Transportation, Healthcare and Telecommunications sectors. We would avoid or short the financial sectors Banks, Non-Bank Finance and Multi-Industry. We would underweight the Auto, Retail and Other Consumer Products sectors as consumer spending contracts further in the US, Europe, China and Japan. In the DETAIL section below, we will review Sector performance, company results, revisions and stock performance over the previous two weeks, as well as adding some brief comments on Sakai Moving Service (9039 JP), Sumitomo Chemical (4005 JP), Parco (8251 JP), Chugai Pharmaceutical (4519 JP), Nichias (5393 JP), Raksul (4384 JP), Daito Trust (1878 JP), and Benefit One (2412 JP).   

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

Founder

Kemp Dolliver, CFA

Cherrystone Hill Research

Equity Capital Markets

Shanghai Henlius Biotech  / Equity Capital Markets

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the <a href="https://www.smartkarma.com/entities/27888" target="_blank" data-smartkarma-citation="entities:27888:1">Shanghai Henlius Biotech (1566213D HK)</a> listing should be aware of the emergence of a drug that potentially is superior to <a href="https://www.smartkarma.com/entities/27906" target="_blank" data-smartkarma-citation="entities:27906:1">Roche Holding AG (ROG SW)</a>'s Herceptin (and Shanghai Henlius' HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. China has only recently "modernized" its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the Shanghai Henlius Biotech (1566213D HK) listing should be aware of the emergence of a drug that potentially is superior to Roche Holding AG (ROG SW)'s Herceptin (and Shanghai Henlius' HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. China has only recently "modernized" its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

Asia Healthcare Analyst, Pathology Associates Limited

Dion Stéfan Büchner M.D., FCAP

Asia Healthcare Analyst

Pathology Associates Limited

Equity Bottom-Up

<ul>
<li>Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size</li>
<li>Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov 2017 for inhibitor pts, co-developed with <a href="https://www.smartkarma.com/entities/26852" target="_blank" data-smartkarma-citation="entities:26852:1">Roche Holding Ag (ROG SE)</a>) approval for non-inhibitor patients will significantly boost <a href="https://www.smartkarma.com/entities/4489" target="_blank" data-smartkarma-citation="entities:4489:1">Chugai Pharmaceutical (4519 JP)</a>’s topline</li>
<li>However, Hemlibra faces fierce competition from <a href="https://www.smartkarma.com/entities/27033" target="_blank" data-smartkarma-citation="entities:27033:1">Shire PLC (SHPG US)</a>’s Advate / Adynovate (antihemophilic factor recombinant), which is currently the gold standard therapy for non-inhibitor patients.</li>
<li>While Hemlibra scores higher with overall positive clinical data and convenient dosage regimen (once a week 1st four weeks, then monthly SC vs 2/3 times a week IV for Shire drugs), concerns remain over recently reported case of development of anti-drug antibody to Hemlibra</li>
<li>On the other hand, Advate/Adynovate has been on the market for &gt;15 years leading to robust safety data in the real-world setting.</li>
<li>Consequently, it will be important to monitor the rate of patient switch from current gold standard therapy to Hemlibra.</li>
<li>We estimate Hemlibra to capture ~40% share of the non-inhibitor market in 5 years after launch and project combined (from inhibitor and non-inhibitor) FY22e global sales potential of $4.3b.</li>
</ul>


Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size
Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov 2017 for inhibitor pts, co-developed with Roche Holding Ag (ROG SE)) approval for non-inhibitor patients will significantly boost Chugai Pharmaceutical (4519 JP)’s topline
However, Hemlibra faces fierce competition from Shire PLC (SHPG US)’s Advate / Adynovate (antihemophilic factor recombinant), which is currently the gold standard therapy for non-inhibitor patients.
While Hemlibra scores higher with overall positive clinical data and convenient dosage regimen (once a week 1st four weeks, then monthly SC vs 2/3 times a week IV for Shire drugs), concerns remain over recently reported case of development of anti-drug antibody to Hemlibra
On the other hand, Advate/Adynovate has been on the market for &gt;15 years leading to robust safety data in the real-world setting.
Consequently, it will be important to monitor the rate of patient switch from current gold standard therapy to Hemlibra.
We estimate Hemlibra to capture ~40% share of the non-inhibitor market in 5 years after launch and project combined (from inhibitor and non-inhibitor) FY22e global sales potential of $4.3b.


As Expected, USFDA Approves Hemlibra for Hemophilia A in Patients Without Inhibitors

United States

Roche Holding AG develops and manufactures pharmaceutical and diagnostic products. The Company produces prescription drugs in the areas of cardiovascular, infectious, autoimmune, respiratory diseases, dermatology, metabolic disorders, oncology, transplantation, and the central nervous system. Roche Holding serves customers worldwide.

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Roche Holding (RO SE)

Immuno-Oncology Drugs in Adjuvant Lung: The Next Frontier in Strengthening Moats

The potential for Merck and Roche looks underappreciated.Innovation in immuno-oncology drugs has supported the moats for Merck & Co Inc. (MRK...

Morningstar, Inc.

🇯🇵 Japan • Fortnightly Update - Liquidity Rules

LIQUIDITY RULES - Despite the continuous stream of negative macroeconomic news from Japan and other economies, financial liquidity trends are the...

Campbell Gunn

HLX02: Innovation Could Overtake

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant...

Kemp Dolliver, CFA

Best Ideas List for January 2019

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering...

Morningstar, Inc.

As Expected, USFDA Approves Hemlibra for Hemophilia A in Patients Without Inhibitors

Non-inhibitor patients constitute ~80-90% of the total hemophilia A population size Consequently, Hemlibra’s (emicizumab, in-house, US Launch -Nov...

Dion Stéfan Büchner M.D., FCAP

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