Through Wednesday, the index has gained 31% from its March low.
SAP SAP, +7.42% SAP, +2.00%
was the standout performer, rising 7% as the German business software giant released its second-quarter results early, saying its adjusted operating profit rose 8%, as the Asia Pacific and Japan region had a strong recovery in software license revenue.
That helped the German DAX DAX, +1.19%
to outperform the other regional indexes in Europe, including the French CAC 40 PX1, +0.17%
and U.K. FTSE 100 UKX, -0.16%
The question confronting markets in the short term is whether another round of U.S. stimulus, as well as the European Union recovery fund, get finalized.
The U.K. on Wednesday rolled out a spending package estimated by the government to be worth £30 billion. “Throw Brexit into the mix (what may be the crucial EU Heads of State meeting is on Oct. 15-16) and a potential spike in business failures as we go through Q3 into Q4, and politically, as well as economically, the odds move even more in favor of a much larger fiscal response later in the year,” said David Owen, European economist at Jefferies.
The takeover would help Uber Eats gain ground against privately held DoorDash Inc., the current market leader in the U.S., through Postmates’ strong sales in Los Angeles, Las Vegas, Phoenix, San Diego and Miami. DoorDash remains the dominant player in New York — where it commands more than half the local market — and San Francisco. Grubhub, gobbled up by Europe’s JustEat Takeaway.com for $7.3 billion in June, is well established in the Midwest.
“We’ve always admired Postmates, I guess, begrudgingly from afar in that it was a competitor who was able to compete aggressively and to be a leader in some very important markets with a much smaller capital base than a lot of its competition, including ourselves,” Uber Chief Executive Dara Khosrowshahi said on a conference call Monday to discuss the deal.
A merged Uber-Postmates would control about 37% of the national market, versus DoorDash’s 45%, based on data from Edison Trends. Postmates’ presence has declined in the face of withering competition from deeper-pocketed competitors. In June, it had a market share of about 8%.
Market consolidation has been inevitable as the coronavirus pandemic accelerates public adoption of food delivery, and companies like Uber diversify their businesses amid a massive slump in ride-hailing revenue.
A land grab was necessary in the U.S., Forrester analyst Sucharita Kodali says, because the European market is already consolidated. In April, Amazon.com Inc. AMZN, +5.37%
received provisional approval for its $575 million investment in UK-based startup Deliveroo.
Wall Street heartily applauded Uber’s move, sending its shares up 5% in early-afternoon trading. Grubhub’s stock is up 2%.
Uber, which announced 3,000 additional layoffs following an 80% drop in ride volume in April, signaled a hard pivot to food delivery. Gross bookings for its Eats business were up 52% year over year in the first quarter. (Bookings on Uber Eats more than doubled in the second quarter, Khosrowshahi said Monday.)
“At a time when our Rides business is down significantly due to shelter-in-place, our Eats business is surging,” Khosrowshahi said on the company’s earnings call in early May.
Uber, which has been looking under the hood at several food-delivery companies for more than a year, initially set its sights on Grubhub. But neither side could agree on a selling price, and the combined operation would have surely faced antitrust scrutiny as the unquestioned market leader.
At the time, Wedbush Securities analyst Ygal Arounian said any buyer of Grubhub would acquire market share in New York, Boston and Chicago “at a premium, in order to speed up rationalization through market-share dominance.”
Postmates, which has flirted with an initial public offering, should greatly help Uber expand delivery into more groceries and other small goods, according to Uber. Postmates recorded $107 million in revenue from $643 million in gross bookings in the first quarter of this year, according to a presentation during Monday’s acquisition announcement.
“Postmates, which is the clear #4 player behind DoorDash, Uber Eats, and Grubhub, would be both a defensive and offensive acquisition in the food delivery space for Uber at a time with its core ride-sharing business seeing massive headwinds in this COVID-19 pandemic,” Wedbush analyst Dan Ives said in a note Monday.
For consumers, ultimately, consolidation could lead to more efficient delivery systems at lower costs, says Rebecca Allensworth, a law professor at Vanderbilt University.
For all the weirdness of the past few months — the Zoom fatigue, the challenge of caring for children and pets and aging parents alongside co-workers — the coronavirus pandemic that’s kept millions of white-collar workers in their homes, not their offices, has presented new opportunities.
It seemed only a matter of time before someone launched an ETF for that, and on Thursday, that fund, the Direxion Work From Home exchange-traded fund — sporting the ticker WFH WFH, +0.13%
, naturally — will start trading.
As it does, a look at what’s inside the portfolio shows some surprises. For such a clearly delineated theme that squares so neatly with the reality of life for so many right now, one of the biggest ironies is how nuanced the fund’s holdings actually are.
The fund is made up of 40 equally-weighted companies ranging from old standbys like Amazon.com Inc. AMZN, +0.40%
and Microsoft Corp MSFT, +0.76%
to the lesser-known, like Proofpoint Inc. PFPT, -1.36%
and Perficient Inc PRFT, -0.75%.
It has of-the-moment pandemic darlings, like Zoom Video Communications Inc. ZM, +1.00%
— and some old guards like Hewlett Packard Enterprise Co HPE, -0.10%.
And its reach stretches from Shenzen, China, with companies like Xunlei Ltd. XNET, +2.54%
, to Cincinnati Bell Inc. CBB,
“This is global in nature, and the benefit of what they’ve done is not just picking the poster children of the working-from-home phenomenon,” said Todd Rosenbluth, head of ETF and mutual-fund research for CFRA. “This fund gives you a mixture of up-and-comers whose business model is being driven by that theme, and some megacaps that will get stock price growth from many things. This is not really a pure-play work-from-home ETF, which I think is positive.”
Direxion says the fund will focus on companies that fall into four buckets representing sub-themes: remote communications, cyber security, project and document management, and cloud technologies.
Rosenbluth also thinks WFH should sit in an investing sweet spot. As an index-based fund, it offers more diversification, and the benefit of stock-picking from an experienced management team, than if investors were to try to select individual stocks themselves.
But it’s a lot less idiosyncratic than many actively-managed funds, most notably some of the ones run by a company like ARK Invest, which represent strong convictions by a small management team about clear winners among innovative technology leaders.
Still, this ETF, like any fund, will have to prove itself. “I don’t think any investors would dispute that we are going to be working from home and thus using the benefits of cloud computing and telecoms,” Rosenbluth said in an interview. Investor interest and flows into the fund will likely be robust because most people agree with that thesis, he noted.
But what will keep people invested is the performance of the individual companies, and thus the fund’s overall returns, Rosenbluth said.
As ARK’s CEO, Cathie Wood, told MarketWatch in early June, even her team struggles to understand how much of a moat some of the early technology winners really have.
WFH will charge a 45-basis point fee, track the Solactive Remote Work Index, and rebalance semiannually.
Diageo and Starbucks just became the latest companies to halt advertising on social-media platforms over ineffective policing of hate speech.
Shares of Facebook Inc. FB, -1.73%,
which operates Instagram and WhatsApp in addition to its namesake platform, erased early losses to rise 0.6% in midday trading, while Twitter Inc. shares TWTR, +0.19%
rallied about 2%. Both stocks took big hits Friday after other advertisers paused spending.
“Diageo DGE, -1.87%
strives to promote inclusion and diversity, including through our marketing campaigns. From 1 July we will pause all paid advertising globally on major social-media platforms. We will continue to discuss with media partners how they will deal with unacceptable content,” the U.K.-based spirits and beers maker said in statement.
On Sunday, coffee giant Starbucks SBUX, -0.33%
said it was “pausing” advertisements on all social-media platforms, and would “continue discussions internally, with our media partners and with civil-rights organizations in the effort to stop the spread of hate speech.” On Friday, Unilever UN, +1.23% ULVR, -2.33%
said it would halt U.S. advertising on Facebook and Twitter through year-end. Its Ben & Jerry’s ice-cream unit had previously announced a Facebook ad pullout.
Coca-Cola KO, +0.13%
said on Friday that it would “pause paid advertising on all social-media platforms globally for at least 30 days.” On Saturday, another iconic American brand, Levi Strauss & Co. LEVI, -2.55%,
announced on Twitter that it, too, it would pause ads on Instagram and Facebook:
Late Friday, Facebook Chief Executive Mark Zuckerberg announced policy changes, during a “virtual town hall,” to hide or block content considered hateful or that could harm voting, with no exception for politicians, an approach Twitter has previously applied to the high-profile account of President Donald Trump and others. Twitter hasn’t been as consistently a target of the boycott call but has come under a new wave of scrutiny, and shares have fallen alongside those of Facebook.
“We invest billions of dollars each year to keep our community safe and continuously work with outside experts to review and update our policies,” a Facebook spokesman said Monday. “We know we have more work to do.”
The spokesman added that the company will continue to work with civil rights groups and other experts “to develop even more tools, technology and policies to continue this fight.”
Twitter’s vice president for global client solutions Sarah Personette said in a statement that the company’s mission “is to serve the public conversation and ensure Twitter is a place where people can make human connections, seek and receive authentic and credible information, and express themselves freely and safely.” She added that Twitter is “respectful of our partners’ decisions and will continue to work and communicate closely with them during this time.”
The boycotts stem from a #StopHateforProfits campaign announced by a coalition of civil-rights and other groups, including the Anti-Defamation League and the National Association for the Advancement of Colored People, which has asked Facebook advertisers to show that they won’t support companies that prioritize profits over safety.
Since the launch of the campaign, the list of companies opting to pause advertising is growing, but Facebook is still looking at less than a 5% hit to revenue, said Rohit Kulkarni, executive director at MKM Partners, in a note to clients.
Firstly, he said Facebook makes the bulk of its revenues from mobile direct ads and small-business marketing. “FB has more than 160 million registered businesses globally and 8 million paying advertisers,” said Kulkarni, who noted that Ad Age’s 100 biggest advertisers spend less on a proportionate basis with Facebook.
“Procter & Gamble PG, +0.75%
is the largest advertiser in the world, but we think it accounts for less than 0.50% of FB’s revenues,” Kulkarni said. Due to COVID-19, he said MKM had already expected leading advertisers to scale back on spending in the second half of this year, “implying a lower marginal headwind” for Facebook. Wall Street is estimating 1% year-over-year growth in the second quarter and 7% in the third. “We believe near-term Street estimates are reasonable and that there is upside potential given ad market recovery.”
He said Snapchat parent Snap Inc. SNAP, -2.10%
could benefit from “near-term uncertainty with advertiser policies related to [Alphabet-owned GOOGL, +1.93% GOOG, +1.85%
YouTube] and Instagram.”
Boasting revenues of over $48 billion in 2019, Novartis (NVS) is one of the largest biopharma companies in the world. Also, at more than 36%, the R&D share of total expenses is among the highest, thus benefiting the company’s Innovative Medicines segment, which is set to expand considerably.
Its share price is on the low side compared to its competitors after failing to properly bounce back from the COVID-19 sell-off. Consequently, there should be some warming up as we progress through the clinical trials and the company’s strong pipeline generates sales.
Figure 1: Comparing Novartis’ share price evolution with Takeda (TAK), Sanofi (SNY) and GlaxoSmithKline (GSK)
In this connection, the fact that Novartis was among the first ones to have prioritized the use of digital technologies in R&D, manufacturing and sales is a strong positive in delivering despite social distancing measures.
Diving into research, clinical trials represent one key aspect of the Swiss giant’s competitive edge.
The drug discovery process
The process of discovering a new drug is tedious, time-consuming and costly.
About 10-15 years are normally needed to develop a new treatment from the discovery of the molecule until its marketing. The problem is that currently, given the human sufferings from COVID-19 and the fact that there are economic downturns impacting economies around the world, we simply cannot wait for years.
To this effect, Novartis is, in my opinion, among the best positioned biopharmas due to the number of clinical trials the company currently has undertaken, as well as its use of digital technologies including AI since 2018 in research.
Figure 2: Number of clinical trials as phase 2 and 3 with the ones involving Hydroxychloroquine in red.
First, as for Hydroxychloroquine, the Swiss company’s medical teams are evaluating the findings reported in the publication following the WHO’s guidance to observe a temporary pause.
Second, the company is involved in seven trials making use of several drugs in collaboration with universities, hospitals and non-profit organizations. Its two main drug candidates are Canakinumab and Ruxolitinib. In addition, it has supported research proposals from Indian Institute of Technology students for other drugs.
Figure 3: COVID-19 related clinical trials for phase 2 and phase 3.
The length of study for phase 3 clinical trials is usually 1 to 4 years. To this end, artificial intelligence can speed up the development of new treatments and therefore reduce the time to market.
Exploring this further, AI can be applied to all of the phases of clinical trials right from the cohort composition and patient recruitment through to patient monitoring.
Now, one area which is suffering from significant difficulties due to COVID confinement measures is monitoring of patients involved in the trials, which has become a challenge for many companies.
However, in the case of Novartis, the company has an AI system called the SENSE tower using which clinicians analyse where there are issues in clinical trials and intervene accordingly. Moreover, researchers are able to gain real-time and predictive information on clinical studies.
Figure 5: Novartis’ new nerve centre, the SENSE tower
In addition, through deployment of digital technologies, the company has been able to monitor trial sites throughout the world.
Going deeper, Novartis is using AI in clinical trials whereby researchers can make use of much more data than before. Also, by joining hands with Massachusetts Institute of Technology and the likes of QuantumBlack, the company has significantly strengthened capacity from 2018.
Figure 6: Application of AI in medical research
Source : Keylogin Analytics
In the past, Novartis has also collaborated with Roche Holding (OTCQX:RHHBY) to develop the blockbuster drug Xolair, which treats allergic asthma and chronic hives. Interestingly, Novartis is Roche’s largest shareholder and holds 6.3% of the shares.
Furthermore, Novartis has other drugs too which are already past phase 4, that is the commercial phase from which it derives significant revenues.
There was a 14% progression in Q1 2020 revenues in comparison with the last quarter year and the company benefited from COVID in terms of forward purchasing and stocking by some customers.
Figure 7: Net sales, Net sales from 20 top medicines and revenues from innovative medicines.
The company has some blockbuster drugs in the form of Cosentyx (used in dermatology) and Entrestro. More importantly with regards to Q2 2020 revenues, it has received approval to launch five treatment options in Japan, including Tabrecta, Entresto, Mayzent, Enerzair and Atectura. Out of these Entresto has significant sales opportunity due to the fact it can be administered to patients at home and hence can help to save lives by keeping patients away from hospitals.
On the other hand, Beovu, which is a treatment for improving vision and reducing retinal fluid in wet AMD patients, has suffered because of safety concerns. On further investigation, I found that the company has been working with retina experts to perform a root cause analysis with the aim to mitigate the safety concerns. This has now been done as shown by the FDA approval after Novartis updated the label to include additional safety information.
However, ophthalmology has been impacted adversely by COVID. Like other medical diagnostic and devices companies operating in the non-life saving sector like dentistry, the ophthalmology franchise has seen a drop in clinic visits, resulting in a fall in the number of prescriptions. There was some optimism voiced out by executives during the first-quarter earnings call, which I find to be realistic as people need eye care. Also, there is the need of the health care community not to defer care for patients.
The executives have also made clear their intentions to actively monitor whether health care systems return to normal prescription and consumption dynamics during the second quarter and across all markets.
For my part, I monitor the company for additional risks in this turbulent period.
Risks and mitigation
First, concerning clinical trials, more than one-third of all phase 3 compounds fail to advance to approval in normal circumstances. Also, with the costs per failed trial being in the range of $0.8–1.4 billion, it is important for the sponsor to have solid legs in order to support these in case a longer time period is needed.
Figure 8: Novartis R&D expenses plus operating margins
Source: Table built by adding individual company’s income statement figures obtained from Seeking Alpha
Here, one matter of critical importance is that despite spending higher (in relative terms) than peers on research, Novartis is still managing to extract a 23% operating margin. This means that it has a higher financial capability to maintain research.
Secondly, there are risks of another company developing a vaccine before Novartis and the investment the company has made in clinical trials is wasted. Gilead (NASDAQ:GILD) is already marketing the antiviral remdesivir, which is currently the only drug approved by the FDA for emergency use in COVID-19.
Therefore, given the fact that no COVID vaccine has been developed together with the significant market which has been created as a result of the light-speed infection rate of the coronavirus, big pharmas should be able to more than recoup investments.
Of predominant importance in this case, two days back the FDA instructed companies to clearly mention on their websites that currently there are no drugs approved to prevent or cure COVID-19 in people.
Finally, COVID-19 has not impacted Novartis’ clinical trials. The fact that the company leverages digital tools has limited the disruption caused by the pandemic. Some slowdowns have been witnessed in new enrollments in ongoing clinical studies, but the SENSE system has been successfully used to track clinical trials (500+) in more than 70 countries.
Valuations and Takeaway
First, Novartis’ share price has not recovered following end of March lows (figure 1), a period which also witnessed significant downsides in other big pharma stock prices.
According to me, the main reason for not being able to recover was safety concerns for the Beovu drug. However, the market seems not to have priced in the fact that the company has already addressed the issue through a work-around as evidenced by the FDA travel approval.
Hence, taking into consideration a 10-13% upside, I obtain a target stock price of $97 to 100. This is below yahoo finance’s stock price of $104.
To support my bullish instance, I strongly believe that despite facing some headwinds in existing treatments like ophthalmology as well as competition from other drug companies, Novartis is still seeing strong sales for its products as it is being able to leverage on digital technologies for patient interaction and delivery.
As a matter of fact, the company has used social media to reach 900,000 health care providers in China, and in the US, it has seen a 1,500% increase in the use of telemedicine. Also, the company has been quick to capitalize on home delivery, in the case of its Xolair drug, thereby reducing the need for people to visit drugstores and thereby helping in saving lives.
Therefore, Novartis is facing some COVID-19 pressure, but it is on track to use technology to transform these challenges into opportunities.
Finally, as for the COVID-19 vaccine, things appear to be getting simpler for biopharmas like Novartis as the FDA has just released guidelines with seem to lower the bar compared to other infectious diseases.
The company has a debt to equity ratio of 0.72 with debt well covered by operating cash flow (58%). At the current price of $87 and dividend yield of 3%, Novartis is a strong buy.
Disclosure:I am/we are long NVS, SNY, GSK.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.
Additional disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.
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