We’re making our first Bullpen update of 2024. The Bullpen is a collection of stocks identified by the CNBC Investing Club team as having the potential to join Jim Cramer’s Charitable Trust. We’re highlighting the four most interesting investment opportunities we found out of the handful of company CEOs Jim interviewed at this week’s JPMorgan Health Care Conference this week in San Francisco. Abbott Labs: Long-time followers of the Charitable Trust, the portfolio we use for the Club, know we had a nice run in Abbott Labs from 2017 through early 2022 and exited our position near $120 per share to reduce the portfolio’s exposure at the time to Covid winners. The stock has essentially traded sideways since then, but we think enough time has passed to take another look at this leader in medical devices and other health-care solutions because it finally may be past its post-pandemic hangover as testing revenues become less of a driver of earnings. The stock was working toward this path over the summer but then Novo Nordisk announced the results of a trial that evaluated weight loss drug Wegovy’s ability to reduce negative cardiovascular outcomes, and in three months Abbott lost about 20% of its value. What the market assumed is that the rise of these GLP-1 drugs (Club name Eli Lilly has two of them on the market ) which help patients manage diabetes better, lose weight, and generally become healthier, would fundamentally disrupt Abbott’s leading diabetes and cardiology units. ABT 5Y mountain Abbott Labs 5 years After the initial slide, the stock started to recover as the market started to realize that the use of GLP-1s and Abbott’s FreeStyle Libre continuous glucose monitoring system was not a zero-sum game. As it turns out, the company’s studies show GLP-1 adopters are seeing better results when they use Libre along with the drugs, suggesting the existential risk to its business is overblown. To be fair, we are still cautious about the impact this new class of drugs will have on the food industry (especially salty snacks and confections) but less so on the health-care side. Outside of devices, Abbott has some other interesting parts of its business, including Nutrition. The division rightfully received a lot of criticism in 2022 due to a recall of its popular baby formula, but the company’s commitment to quality and safety has helped it move past this. It also has a lineup of nutrition shakes for adults, and we think this product could be a beneficiary of the GLP-1 craze, providing protein to those trying to limit the muscle loss associated with these medicines. Now that the Covid overhang is in the rear-view mirror and the market is starting to see that those GLP-1s concerns are overblown, investors should start to appreciate all the growth and innovation that’s happening at Abbott. In the third quarter, organic sales from its underlying base business (which excludes Covid tests) grew 13.8% year over year and each of Abbott’s four major businesses grew at a double-digit clip. Amgen: For most of last year, the focus for Amgen was on overcoming a challenge from the Federal Trade Commission to the biotech company’s nearly $28 billion takeover of Horizon Therapeutics. After the FTC sued to block the deal last May, Amgen reached a settlement with minimal concessions in September and the deal closed in early October. With that transaction now complete, we can look to Amgen’s future, including the company’s four-pillar long-term growth strategy focused on (1) General Medicine, (2) Oncology, (3) Rare Disease, and (4) Inflammation, which Horizon specializes in. Analysts at BMO Capital recently estimated that revenue from Horizon could grow to $6.2 billion by 2030, helping Amgen grow as other parts of its business face pressure. But the number one question investors currently have for nearly every pharma company is what’s their obesity strategy? Everyone is trying to play catch to Eli Lilly and Novo Nordisk. If we were to place a bet on who the third biggest player will be, it may Amgen. AMGN 5Y mountain Amgen 5 years Given how entrenched Lilly and Novo Nordisk are in their leadership, the only way to take share would be to develop a differentiated product. Amgen may have something in the works. It is called AMG 133, and what makes it unique is its less frequent dosing schedule. AMG 133 is a once-monthly injection while Lilly’s tirzepatide (Zepbound for obesity and Mounjaro for diabetes) or Novo Nordisk’s semaglutide (Wegovy and Ozempic) are once weekly. It’s highly unlikely that anyone will knock Lilly or Novo off their obesity thrones, but we can make the case that a once-monthly injection would allow Amgen to carve out some share in this $100 billion-plus market. A phase two readout is expected sometime in the second half of this year. Amgen is also working on an oral medication and phase 1 data is expected sometime in the first half of this year. Of all the up-and-comers trying to break into the obesity market, Amgen may be the best bet. And at roughly 15 times earnings, it’s an inexpensive way to play it. Novartis: Over the past decade Novartis has undergone a transition into a pure-play on innovative medicines by spinning out eye health unit Alcon a few years ago and completing the separation of the Sandoz generics and biosimilars business last fall. As a result, Novartis has become a much more focused company. It has prioritized its efforts on four core therapeutic areas (1) Cardiovascular-Renal-Metabolic, (2) Immunology, (3) Neuroscience, and (4) Oncology and four priority markets — the U.S., China, Germany, and Japan — and just a handful of technology platforms. By doing so, Novartis has created a “new” company with a much more attractive financial profile. Since undergoing this transformation in 2014, its core margins have expanded from 26% to 36.9% through the first nine months of 2023. Looking out to 2027, management believes it can increase core margins to about 40% while continuing to grow sales at a mid-single-digit clip each year. Management expects to deliver on these goals through a mix of sales from its existing brands and execution on its pipeline. Novartis currently has six marketed brands with multibillion sales potential, and five of these are expected to retain exclusivity out to 2030 and beyond. The company is also doing good work on its pipeline of new drugs and expanding indications on its existing lineup. In the past year, it has delivered 10 positive phase three readouts and presentations. NVS 5Y mountain Novartis 5 years The business is also spewing out a ton of cash. Since 2014, Novartis has increased its free cash flow from $6.8 billion, or 15.6% of sales, to $11.0 billion, or 32.4% of sales. This has allowed management to reinvest in research and development (R & D), grow its annual dividend, and repurchase shares. From 2018 to 2023, Novartis has bought back more than $32 billion worth of stock — and on a $15 billion program announced in July 2023, it has slightly under $13 billion remaining to be executed. Walgreens Boots Alliance: Of the different companies we heard from at the conference, Walgreens stood out to us as the best potential turnaround story. The pharmacy stock was the worst in the Dow Jones Industrial Average last year, and it’s off to a sluggish start to 2024 after the company reported mixed results last week and slashed its dividend by almost 50%, readjusting the yield to roughly 4%. Looking back even further, this has been a stock you have wanted to avoid for years due to challenges at the front of the story (the retail part) from Club name Amazon , and headwinds facing pharmacies and PBMs. WBA 5Y mountain Walgreens 5 years After some turnover in the C-suite, Walgreens has finally found a leader who can right this ship. Tim Wentworth became CEO in October, and he’s a highly respected health-care executive who had successful runs as the CEO of Express Scripts and CEO of Evernorth, Cigna ‘s health services subsidiary. He adds credibility to a company that has sorely lacked it. As JPMorgan analysts pointed out in late October when they upgraded Walgreens to a buy-equivalent overweight, Wentworth never missed a quarter during his time as CEO of Express Scripts between 2016 and 2018. Part of Wentworth’s early focus is on cost savings and cash generation. The dividend cut allows them to free up capital to invest in the business and pay down debt. He’s also set a target of generating $1 billion of savings in fiscal year 2024 through rightsizing its cost structure, closing underperforming stores, and reducing capital expenditures. Walgreens also owns a roughly $6 billion stake in drug wholesale company Cencora (previously known as AmerisourceBergen), which it can monetize if need be. Turnarounds require a lot of work and often they can become more complicated than what is initially believed. But if there’s a leader who can pull it off at Walgreens, it’s Wentworth given his industry expertise. A hard lesson over the past few years has been to be skeptical about bullish CEOs at a struggling company, but we always like to see it when they put their own money where their mouth is. That’s why we took notice of Wentworth’s purchase of 10,000 shares at an average price of $24.222 last Friday worth nearly a quarter of a million dollars. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) 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We’re making our first Bullpen update of 2024. The Bullpen is a collection of stocks identified by the CNBC Investing Club team as having the potential to join Jim Cramer’s Charitable Trust. We’re highlighting the four most interesting investment opportunities we found out of the handful of company CEOs Jim interviewed at this week’s JPMorgan Health Care Conference this week in San Francisco.
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