CAM Investment Grade Weekly Insights

Fund Flows & Issuance: According to Wells Fargo, IG fund flows on the week were the 4th largest inflow on record, at $6.3bln. This brings the YTD total to +$248.232bln in total inflows into the investment grade markets. According to Bloomberg, investment grade corporate issuance for the week was $16.15bln, and YTD total corporate bond issuance was $1.077t. Investment grade corporate bond issuance thus far in 2017 is down 5% y/y when compared to 2016. October issuance is off to a slow start, relative to what we have seen through much of 2017, but this can be attributed to earnings blackout as well as the timing of the release of employment data.

(Bloomberg) Disney-Altice Deal Shows Operators Will Still Pay for Sports

• Walt Disney Co. and cable provider Altice USA Inc. reached a preliminary programming agreement that will enable 2.4 million New York-area pay-TV subscribers to continue to get ABC, ESPN and the Disney Channel.
• The two sides “have extended the deadline accordingly to try and finalize the terms,” according to a joint email on Sunday. No details were included in the statement. The preliminary terms were struck at the last minute, as Disney was about to cut off broadcasting to Altice subscribers Sunday night.
• Disney won price increases for its major channels, though not as much as the Burbank, California-based entertainment giant originally asked, according to two people familiar with the terms who asked not to be named because the discussions are private. Altice also agreed to pick up two collegiate sports networks, the people said.
• The agreement, if finalized, shows that pay-TV operators are still willing to pay for pricey sports channels even in an age of video streaming and declining viewership. The talks were seen as a litmus test of the business model that’s fueled Disney’s profit for years: charging ever-higher fees for ESPN even though many consumers don’t watch sports, and using the network’s popularity to force pay-TV providers to carry other programming.

(WSJ) Monsanto Boosted by Continued Adoption of New Products

• Monsanto has been introducing soybean varieties that are genetically engineered to resist a more powerful combination of herbicides. More than 20 million U.S. acres were sown with the new seeds, the company said Wednesday, and it expects to have the supply for 40 million acres across next year’s planting season.
• For the quarter Monsanto reported income of $20 million, or 5 cents a share, up from a loss of $191 million, or 44 cents a share, a year ago. Revenue grew 4.8% to $2.69 billion. On an adjusted basis, earnings were 20 cents a share.
• The positive adjusted profit was far higher than the loss of 41 cents that analysts had projected. Monsanto said the better-than-expected results were due to tax benefits and a pretax benefit of $200 million due to corn licenses in Brazil.

(Bloomberg) PepsiCo Makes E-Commerce Bet as Amazon Roils Food Industry

• The food-and-beverage giant has created a 200-person business unit that’s tasked with spurring online growth in a fast-evolving grocery landscape. So far, it’s working. PepsiCo is on pace to hit $1 billion in annualized e-commerce sales this year, Chief Financial Officer Hugh Johnston said in an interview.
• That’s about double the rate a year earlier, even if it remains a small piece of the pie. PepsiCo has total revenue of about $63 billion a year.
• “That business is just really growing like crazy,” said Johnston, who also serves on Microsoft Corp.’s board. “We run it more like a tech company than we do a consumer-products company, and it’s a real star of the portfolio for us right now.”
• To further set the online business apart, it’s located in midtown Manhattan — about an hour from the company’s suburban headquarters in Purchase, New York.
• The group is focused on marketing and packaging PepsiCo’s products for online sellers, including Amazon.com Inc. and Boxed Wholesale, as well as traditional brick-and-mortar grocers that are trying to boost their digital footprint. The division was founded about two years ago, but PepsiCo has been quiet about it until now.
• PepsiCo faces more pressure to go big in e-commerce because grocery sales of soft drinks have weakened, especially in North America. And the overall food industry is bracing for a wave of change. Grocery companies have been rocked this year by Amazon’s $13.7 billion purchase of Whole Foods Market, a deal that sent shares of traditional supermarkets tumbling.

(WSJ) Corona is the New King of Beers

• U.S. beer sales are in a funk, but Americans are still clamoring for Mexican suds.
• Constellation Brands Inc., STZ the U.S. distributor of Corona and Modelo, reported a 13% jump in beer sales in the summer months. The gains come as market leaders Budweiser and Bud Light are hemorrhaging volume and even craft beer—which until two years ago was growing in the double digits—is experiencing a shakeout.
• “It’s a little bit of a misnomer to think that the growth in the beer category, to the extent that there is any, is coming from imports” from around the globe, said the company’s chief executive, Robert Sands, on a conference call Thursday to discuss the latest results. “It is not. It is coming from Constellation’s portfolio of Mexican beers.”
• The company has expanded beyond its roots as a bulk wine distributor, adding well-known brands such as Robert Mondavi and spirits like Svedka vodka. It now gets two thirds of its revenue from the beer division, which also includes Ballast Point, a craft brewer it acquired for $1 billion in 2015. In the latest quarter, Constellation purchased the small Florida craft brewery Funky Buddha.
• Constellation plans a national launch next year for a new version of Corona called Corona Premier, as well as a rollout of a product called Corona Familiar in major Hispanic markets—a key demographic for the brand.
• Constellation attributed 60% of its growth to expanded distribution, and Mr. Sands said Thursday that he’s still unsatisfied on that front. “We don’t have the distribution that we ought to have as a company,” he said. “There’s a big growth runway ahead of us.”

(Bloomberg) Lilly Jumps to Two-Year High After Cancer Drug Patent Upheld

• Eli Lilly’s patent for its lung cancer drug Alimta was upheld, the Patent Trial and Appeal Board said in an opinion. Shares rise as much as 2.5% to the highest since September 2015.
  
  • Patent expires in May 2022; Alimta is LLY’s third-biggest drug behind Humalog and Cialis, making up $532.9m or 9.1% of total pharma sales in 2Q: Bloomberg data
  • Teva, Apotex, Neptune Generics and others had filed the challenge; other companies later joined the petition
  • The PTAB decision can be appealed to the U.S. Court of Appeals for the Federal Circuit, which had already upheld the validity of the patent in January

(WSJ, Press Release) Teva Comments on Anticipated At-Risk U.S. Launch of Generic

• Teva Pharmaceutical Industries Ltd. today commented that any launch by Mylan of a generic version of COPAXONE(R) 40mg/ml (glatiramer acetate) prior to final resolution of the pending patent appeals and other patent litigation should be considered an “at-risk” launch, which could subject Mylan to significant damages among other remedies. Additionally, Mylan also announced approval of a generic glatiramer acetate 20mg/mL.
• “We have planned for the eventual introduction of a generic competitor to glatiramer acetate,” said Dr. Yitzhak Peterburg, Teva’s Interim President and CEO. “We remain confident in patient and physician loyalty to Teva’s COPAXONE(R) due to its recognized efficacy, safety and tolerability profile, and we will continue to promote and support the product. As we are closing the third quarter, it is too soon to officially comment on any change to our full year business outlook.”
• Two appeals will be argued before a single panel of judges of the U.S. Court of Appeals for the Federal Circuit. In the first case, Teva is appealing the December 2016 inter partes review decisions of the Patent Trial Appeal Board that found all of the claims of three COPAXONE(R) patents to be unpatentable. In the second case, Teva is appealing the January 2017 decision of the U.S. District Court for the District of Delaware, which declared certain claims of four COPAXONE(R) patents invalid. The two appeals have been fully briefed and await the scheduling of oral arguments. In additional litigation, Teva brought suit against five Abbreviated New Drug Application (ANDA) filers, including Mylan, for infringement of a patent covering a manufacturing process for glatiramer acetate product.
• Due to the anticipated launch of another generic 20mg glatiramer acetate product and the anticipated launch of a first generic 40mg glatiramer acetate product, Teva’s early assessment of the impact of these launches to its earnings for the fourth quarter ended December 31, 2017 is that it could be affected by at least $0.25 cents per share. These conditions are subject to change based on the discount; adoption rate; and other factors of the competitive products. Teva will provide additional details on its 3(rd) Quarter Earnings Conference Call on November 2, 2017.

(Bloomberg) Hurricanes Wash Out More Than Payrolls in September

• U.S. payrolls fell 33k in September, considerably weaker than the consensus estimate, which called for an 80k increase. The month of August was revised to a rise of 169k (previously estimated to have been a 156k gain). The two-month payroll net revision was -38k. The 3Q average of 91k currently stands less than half the 2Q average of 187k, and weaker than the 12-month average of 148k.
• The hurricanes had an outsized impact on employment. Absences from work due to bad weather (1474k) and weather-related curtailments of average weekly hours (2934k) significantly exceeded their respective historical averages (10-year averages stood at 44k and 236k, respectively, before the report). Average hourly earnings were also vulnerable to storm-distortion. Acute demand for utility workers resulted in a spike in average hourly earnings in the sector, large enough to influence the overall outcome. Average weekly hours for utility workers also jumped. The leisure and hospitality industry bore the brunt of the storms’ impact on employment.