Tag Archives: AGN

Inflation, Lower Earnings, Or Both: How To Be Ready

Fears of a trade war have subsided, but recent economic releases may be showing it’s too late to avoid some of the pain.

Signs of inflation have already been creeping higher and price pressures for manufacturers might foreshadow a surge in consumer prices that could force the Fed to increase rates faster than expected.

The problem is that it may be a no-win situation for businesses and their investors. Passing costs on to consumers could slow sales and subsequent rate hikes could slow the economy. However, not passing costs on to consumers could decimate earnings.

There are only a few sectors and industries that could escape this lose-lose scenario.

These Two Problems Could Be Bigger Than A Trade War
While we may avoid a full-blown trade war, the prospect of one may have already caused an increase in prices. The Producer Price Index (PPI) measure of input costs has risen in six of the past eight months and import prices have recently jumped the most in six years.

That could be due in part to manufacturers rushing to order inputs ahead of tariffs, inadvertently driving up prices at suppliers.

One measure flashing red is delivery time, which indicates how long it takes vendors to get input products to manufacturers. The measure jumped to its highest point on record since 1968 and is giving input suppliers power to increase prices.

Annual increases in producer costs have been above 3% since 2016, but businesses have been reluctant to pass these increases on to consumers. The Consumer Price Index (CPI) increased 2.35% in March, its highest rate in a year, and year-over-year growth could surge on comparison with last year’s summer drop in cellular pricing.

This is all setting up a move to inflation, lower earnings, or both — and the prospect of either looks like it is already weighing on business activity.

Six-month business activity outlook measured by the New York Fed plunged to 18.8 from 44.1 last month, its weakest since February 2016, and the Philly Fed measure of the same survey is also at its lowest since July 2017.

The most likely scenario is that we get a combination of higher prices and slowed earnings growth as businesses try to share the costs with consumers. A problem here is that not only does it decrease profit margin, but it also forces the Fed to stay vigilant on inflation, raising rates and potentially slowing overall economic growth.

Some notable economists have already been predicting the dual threat of rising prices and slower growth. Last year, Former Fed Chair Alan Greenspan told Bloomberg, “Stagflation is about to emerge. We are moving into a different phase of the economy, to a stagflation not seen since the 1970s.”

3 Groups For Safety And Pricing Power
I doubt we see the extremes of stagflation that have happened in the past but even if the worst is avoided, the trend is clearly to an environment of higher prices and subdued economic growth. Ahead of this environment, investors may want to reposition in sectors and industries with stronger pricing power that can share their costs with consumers.

Companies producing commodities have already started rallying on higher metals and energy prices. Prices for real assets like precious and industrial metals, oil and gas, and real estate are linked to inflation, though higher interest rates could weigh on property prices.

Cabot Oil & Gas (NYSE: COG) has a strong position in the Marcellus Shale, a low-cost region for natural gas production that puts the company’s break-even around $2.00 per mcf against spot prices around $2.80 per mcf. The company owns the rights to an additional 3,000 drilling locations within its undeveloped footprint which gives it the potential to increase output easily.

Cabot has been divesting non-core assets to become a pure-play natural gas producer. That’s left it with a very strong balance sheet with just $1.2 billion in debt and $480 million in cash. With operational cash flow of nearly $900 million a year, it’s been able to increase the dividend payout and re-authorize a share repurchase program.

Pharmaceuticals typically have strong pricing power and much of the rhetoric against the industry seems to have died out. An overhang of sales weakness in generics, public concern on pricing and heavy debt loads has kept the industry from benefiting from the broader market rally and some good deals can be found.

Allergan’s (NYSE: AGN) recent decision to back out of a bidding war for Shire (Nasdaq: SHPG) gives me new confidence in the company. While the acquisition could have given Allergan a diversified rare-disease portfolio of drugs, it would have meant a debt-binging acquisition and I’m always hesitant around the ‘winner’ of bidding wars.

Allergan has used the cash from its generics sale to Teva wisely with smaller acquisitions, share repurchases, and to pay down debt. The company now holds just $19.3 billion in net debt and generates almost $5 billion in free cash annually.

Allergan has one of the most diversified drug pipelines in the industry. Only two drugs, Botox and Restasis, account for more than 9% of sales. This helps to smooth revenue versus peers that must worry about sales growth when big blockbuster drugs come off patent.

Companies in the utilities sector could provide safety as price increases are often linked to increases in the CPI or other indexes. State regulated utilities have especially stable sales and benefit from no competition in their regulated markets.

The Southern Company (NYSE: SO) is quickly transforming itself from a mostly coal-generated utility to one powered by nuclear, natural gas, and other renewables. The company enjoys a state-regulated monopoly position in four states which together account for approximately 80% of earnings.

While regulatory approval on rates can slow earnings growth, it also means that capital spending and increased output is all but guaranteed to be profitable as long as the company maintains a return-on-investment hurdle for spending. Shares pay an attractive 5.1% yield and the company is investing heavily to increase earnings.

Risks To Consider: While some sectors would provide relative protection, levels of inflation and growth like those seen in the 1970s could decimate stocks and the bull market.

Action To Take: Position in companies within utilities, pharmaceuticals and energy with stronger pricing power and relatively stable sales against the trend to higher producer prices and a sluggish economy.

Editor’s Note: Since 1926, one collection of stocks has accounted for HALF of the S&P’s return — through every market environment imaginable. If you don’t have this group in your own portfolio, you could be missing out on the single best place to put your money this year and next. Learn which stocks can…

Your Daily Pharma Scoop: IRWD Division, Jazz sNDA, Siga Adcomm

Analysis focus: IRWD

Ironwood Pharma (NASDAQ:IRWD) is going to split into two separate companies, both publicly traded, with one focusing on commercialization and the other on R&D. This move will happen in the first half of 2019 and be tax free to current shareholders.

Ironwoods linzess, which was approved 6 years ago in irritable bowel syndrome with constipation and for treatment of chronic idiopathic constipation. Recently, as we know, Synergy Pharmas (NASDAQ:SGYP) Trulance got approved by the FDA for the same indications. Now, according to some sources, Trulance is a safer drug than Linzess. However, Trulance has not been able to take off as well as investors had assumed, although it has put a dent in the prospects of Linzess.

Linzess is marketed by Allergan (NYSE:AGN), which has considerable marketing prowess. Now, this bid to separate IRWD into two divisions probably owes itself to one reason – that after 6 years of approval, IRWD has still not been able to become profitable. As the announcement of this news says, the commercial division of IRWD, which is focused on Linzess, ..is expected to be profitable in 2019. That means, if you reduce the R&D expenses from the total cash burn of the company, then it could become profitable on Linzess revenues. At least, that seems to be the idea.

The other division will do R&D on cyclic guanosine monophosphate pharmacology to advance a pipeline of treatments for rare and serious diseases led by mid-stage candidates praliciguat and olinciguat. This will be the division that will look for future treatments to bring to market as Linzess completes its market cycle.

For SGYP investors, what is interesting to note here is that this move seems aimed to make Linzess profitable for at least a part of the company. That is to say, the old Ironwood has to shed the more cash burning part of it – the R&D section – to make this happen.

This could mean, either, that Trulance is really taking over some of Linzess traditional market, and/or the market itself is not sustaining enough for Linzess to make enough money to cover Ironwoods entire cash requirements, although IRWD has managed to reduce OpEx drastically.

The first idea is a good thing for Synergy investors; the second is a sobering conclusion of how just getting a product approved but without proper money and marketing management can still ruin the future prospects of a company.

In related news, IRWD released earnings results for Q1 and missed both by EPS and by revenue, despite seeing a 32% increase in revenue Y/Y.

Stocks in News: Analysis of JAZZ, SIGA

Jazz Pharma submits U.S. marketing application for expanded use of Xyrem

Discussion: Jazz Pharmas (NASDAQ:JAZZ) Xyrem was first approved in 2002 to treat cataplexy in narcolepsy and for EDS in narcolepsy. This expanded use sNDA will increase the scope of Xyrem to include pediatric patients. The market isnt much because Age of onset for narcolepsy typically occurs in the second decade of life; however, diagnosis can occur 1016 years later on average.

FDA Ad Com backs SIGA’s smallpox treatment

Discussion: Naturally occuring smallpox was eradicated in 1980, but SIGA technologies (NASDAQ:SIGA) TPOXX (tecovirimat) is an antiviral oral treatment targeting smallpox when used as a biological weapon, for which no medicine exists as of now. Vaccination is risky and not efficient for people with low exposure risks, especially for an eradicated disease. However, the market for this new drug candidate will be for defense purposes. PDUFA is August 8.

In other news

Karyopharm (NASDAQ:KPTI), which was highlighted in yesterdays scoop, has now come up with a $125mn stock offering, taking the stock down 3%.

Mallinckrodts (NYSE:MNK) stannsoporfin has an adcomm on Thursday for elevated blood bilirubin in neonates (at least 35 weeks’ gestational age) with indicators of hemolysis (rupture of red blood cells) who are at risk of developing severe hyperbilirubinemia (excess bilirubin in the blood). This is a small market.

Medtronics (NYSE:MDT) Deep Brain Stimulation therapy has been approved by the FDA as adjunctive therapy for adult patients with partial onset seizues in drug resistant epilepsy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.