The pharmaceutical sector has been slowly but steadily recovering
from the impact of the patent cliff being faced by several
companies over the past few years. The worst of the patent cliff is
over and the NYSE ARCA Pharmaceutical Index (^DRG) is up 21.4% over
the last year. So far in 2014, the index is up 6.9%.
Several companies which had been struggling to post growth in the
face of genericization over the past few years are now on the
recovery path. New products should start contributing significantly
to results, and increased pipeline visibility and appropriate
utilization of cash should increase confidence in the sector.
Products that lost exclusivity recently include
Eli
Lilly’s (LLY) Cymbalta and Evista.
AstraZeneca’s (AZN) Nexium could also start facing
generics from May 2014 in the U.S. where sales were $2.1 billion in
2013.
Collaborations, Acquisitions and Restructuring
The pharma sector witnessed major merger and acquisitions (M&A)
activity over the last couple of years. Going forward, we expect
small bolt-on acquisitions to continue. In-licensing activities and
collaborations for the development of pipeline candidates have also
increased significantly. Several pharma companies are focusing on
in-licensing mid-to-late stage pipeline candidates that look
promising, instead of developing a product from scratch, which
involves a lot of funds and time.
Small biotech companies are open to in-licensing activities and
collaborations. Most of these companies find it challenging to
raise cash, thereby making it difficult for them to survive and
continue with the development of promising pipeline candidates.
Therefore, it makes sense for them to seek deals with pharma
companies that are sitting on huge piles of cash.
We recommend biotech stocks that have attractive pipeline
candidates or technology that can be used for the development of
novel therapeutics. Therapeutic areas which could see a lot of
in-licensing activity include immuno-oncology, oncology, central
nervous system disorders, diabetes and immunology/inflammation. The
hepatitis C virus (HCV) market is also attracting a lot of
attention.
Some recent acquisitions/deals include
Shire’s
(SHPG) acquisition of ViroPharma,
Salix’s (SLXP)
acquisition of Santarus as well as the acquisition of Optimer
Pharmaceuticals and Trius Therapeutics by
Cubist
Pharmaceuticals (CBST) and that of Elan by
Perrigo
Company (PRGO). A major acquisition agreement was
announced recently -- that of
Forest Labs (FRX) by
Actavis (ACT). This deal shows the intention of
generic companies to establish a strong position in the branded
market. Another significant deal was the one signed between
Celgene (CELG) and
OncoMed
Pharmaceuticals (OMED) for the joint development and
commercialization of up to six anti-cancer stem cell candidates
from OncoMed's biologics pipeline.
Another trend that we are seeing in recent months is the divestment
of non-core business segments.
Pfizer (PFE) sold
its Capsugel unit and its Nutrition business in Aug 2011 and Nov
2012, respectively. Pfizer then spun off its animal health business
into a new company,
Zoetis (ZTS).
Meanwhile,
GlaxoSmithKline (GSK) divested certain
non-core brands from its Consumer Healthcare segment. In Aug 2011,
AstraZeneca sold its Astra Tech business to
DENTSPLY (XRAY). The monetization of non-core
assets will allow the pharma/biotech companies to focus on their
areas of expertise.
Abbott Labs (ABT) split into
two separate publicly traded companies; while one company deals in
diversified medical products, the other,
AbbVie
(ABBV), is focusing on research-based pharmaceuticals.
Johnson & Johnson (JNJ) is also looking to
divest its ortho-clinical diagnostics business.
Vertex (VRTX) monetized its Incivo-related
royalties; the company can use the cash generated from this deal
for its cystic fibrosis program.
Restructuring activities are also gaining momentum as large pharma
companies are looking to cut costs and streamline their operations.
Most of these companies are re-evaluating their pipelines and
discontinuing programs which do not have a favorable risk-benefit
profile. Some of the companies that announced restructuring plans
include
Merck (MRK),
Novartis
(NVS), Eli Lilly, Shire and
Sanofi (SNY).
Destination Ireland
Of late, several companies have been looking towards Ireland for
acquisitions. The latest company to join the Irish club is
Horizon Pharma (HZNP) which is doing a reverse
merger with Dublin-based Vidara. Tax benefits are a major
attraction for such deals. Other such recent acquisitions include
that of Warner Chilcott by Actavis and Elan by Perrigo.
Emerging Markets and Biosimilars
Another trend seen in the pharmaceutical sector is a focus on
emerging markets. Companies like
Mylan (MYL),
Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to
expand their presence in India, China, Brazil and other emerging
markets.
Until recently, most of the commercialization efforts were
focused on the U.S. -- the largest pharmaceutical market -- along
with Europe and Japan. Emerging markets are slowly and steadily
gaining more importance, and several companies are now shifting
their focus to these areas.
However, while higher demand for medicines, government
initiatives for healthcare, new patient population and increasing
use of generics should help drive demand, we point out that
emerging markets are also not immune to genericization. Moreover,
investigations into bribery charges in China could put a lid on
near-term growth.
Meanwhile, growth in Europe will continue to be pressurized by
austerity and cost-containment measures.
We are also seeing several companies entering into deals for the
development of biosimilars, generic versions of biologics.
Companies like Merck, Amgen, Biogen (BIIB) and
Actavis are all targeting the highly lucrative biosimilars
market.
4Q Earnings
All companies falling under the Medical sector have reported fourth
quarter and full year 2013 results. While earnings-beat and
revenue-beat ratios (percentage of companies coming out with
positive surprises) were pretty impressive, growth ratios were
modest. Fourth quarter results were characterized by currency
headwinds as well as the impact of generics.
Fourth quarter 2013 earnings "beat ratio" was 74.0% while the
revenue "beat ratio" was 76.0%. Total earnings for this sector were
up 1.1%, compared to 0.2% recorded in the third quarter of 2013.
Total revenues moved up 5.3% in the quarter versus 5.8% growth in
the third quarter of 2013.
Looking at the consensus earnings expectations for the first
quarter, earnings are expected to decline 3.3%. Tough challenges
for some companies, negative currency movement and a few patent
expirees will affect first quarter growth. However, growth should
pick up from the second quarter for which 1.6% earnings growth is
expected.
Overall, 2014 earnings are expected to grow 6.5%. For a detailed
look at the earnings outlook for the Medical and other sectors,
please check our Zacks Earnings Trends report.
Focus on New Products
2013 saw the FDA approving 27 novel medicines, about one-third
(33%) of which were identified by the FDA as “First-in-Class,”
meaning they use a new and unique mechanism of action for treating
a medical condition. These include drugs like Invokana (type II
diabetes), Kadcyla (HER2-positive late-stage breast cancer),
Sovaldi (an interferon-free oral treatment for some patients with
chronic hepatitis C) and Mekinist (metastatic melanoma).
Yet another one-third of the approved drugs fall under the rare or
“orphan” disease category that affects 200,000 or fewer Americans.
These include Imbruvica (mantle cell lymphoma), Gazyva (chronic
lymphocytic leukemia), Kynamro (homozygous familial
hypercholesterolemia) and Adempas and Opsumit (both for pulmonary
arterial hypertension). Three of the approved drugs – Gazyva,
Imbruvica and Sovaldi – had breakthrough therapy designation.
Breakthrough status, a new designation that became effective after
Jul 9, 2012, is designed to cut short the development time of
promising new treatments.
Some important products approved in 2013 include:
Drugs like Tecfidera, Sovaldi and Imbruvica represent strong
commercial potential.
So far in 2014, drugs that have gained approval include
AstraZeneca’s Myalept (complications of leptin deficiency) and
Farxiga (type II diabetes), Chelsea Therapeutics’
(CHTP) Northera (to treat neurogenic orthostatic hypotension),
BioMarin’s (BMRN) Vimizim (Morquio A syndrome) and
Vanda Pharma’s (VNDA) Hetlioz (non-24- hour
sleep-wake disorder).
Upcoming events include FDA advisory panel review of the regulatory
application for MannKind’s (MNKD) experimental
diabetes treatment, Afrezza. April should be an active month with
the agency expected to deliver a response on the approvability of
several experimental drugs including Afrezza, Glaxo’s Eperzan (type
II diabetes) and Arzerra (CLL).
Zacks Industry Rank
Within the Zacks Industry classification, pharma and biotech are
broadly grouped into the Medical sector (one of 16 Zacks sectors)
and further sub-divided into four industries at the expanded level:
large-cap pharma, med-biomed/gene, med-drugs and med-generic
drugs.
We rank all the 260-plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more, visit: About Zacks
Industry Rank.
As a point of reference, the outlook for industries with Zacks
Industry Rank #88 and lower is ‘Positive,’ between #89 and #176 is
‘Neutral’ and #177 and higher is ‘Negative.’
The Zacks Industry Rank for large-cap pharma is #225,
med-biomed/gene is #69, med-drugs is #84, while the med-generic
drugs is #8. Analyzing the Zacks Industry Rank for different
medical segments, it is obvious that the outlook is Positive for
med-drugs, med-biomed/gene and med-generic drugs and Negative for
large-cap pharma stocks.
OPPORTUNITIES
While several companies will continue to face challenges like EU
austerity measures and genericization, the pharma industry is out
of the worst of its genericization phase. Many companies which had
faced generic headwinds in the last couple of years should continue
to see a sustained improvement in results this year. Cost-cutting,
downsizing, streamlining of the pipeline, growth in emerging
markets and new product launches should support growth.
Among pharma stocks, Shire, a Zacks Rank #1 (Strong Buy) stock,
looks well-positioned for growth with the company expanding its
product portfolio and pipeline through the acquisition of
ViroPharma. Horizon Pharma, a Zacks Rank #2 (Buy) stock, also seems
on the right path with the company announcing its plans to acquire
Ireland-based Vidara.
In the biotech space, we are positive on Biogen. Tecfidera, the
company’s recently launched oral multiple sclerosis drug, is off to
a strong start with the product delivering sales of $876 million
(as of Dec 31, 2013) since its launch in early April 2013. While
Tecfidera has gained the top spot in the oral multiple sclerosis
market in the U.S., Avonex and Tysabri should continue contributing
significantly to sales. Tecfidera gained EU approval recently.
Biogen is also progressing with its hemophilia pipeline.
We are also positive on Amgen (AMGN). Amgen should
be able to deliver on its long-term strategy based on expansion in
key markets, launch of new manufacturing technologies, and pipeline
development. Enbrel should continue performing well. Amgen’s
late-stage pipeline is also moving along. While Amgen is a Zacks
Rank #2 stock, Biogen is a Zacks Rank #3 (Hold) stock.
Gilead, a Zacks Rank #1 stock, continues to do well in the HIV
segment and has a potential blockbuster in its portfolio in the
form of HCV treatment, Sovaldi.
Among generic companies, Actavis looks well-positioned. Actavis is
slowly and steadily building its position in the branded market
through acquisitions (Actavis Group, Warner Chilcott and the
upcoming acquisition of Forest). With fewer major patent expiries
slated to occur in the next few years, we are encouraged by
Actavis’ focus on building its branded and biosimilars pipeline.
The company carries a Zacks Rank #2.
WEAKNESSES
We recommend avoiding names that offer little growth or opportunity
for a take-out. These include companies which are developing drugs
that are likely to face regulatory hurdles.
Among large-cap pharma companies, Eli Lilly is gearing up for
another round of patent expiries -- Cymbalta in Dec 2013 and Evista
this year. We prefer waiting on the sidelines until the company is
able to emerge from the impact of genericization.
Companies that currently carry a Zacks Rank #4 (Sell) include
Bayer (BAYRY), Sanofi and Glaxo among others.
Sanofi, which is facing currency headwinds, was in the news
recently related to the development of its PCSK9 inhibitor,
alirocumab. The FDA has asked Sanofi and partner
Regeneron (REGN) to evaluate potential
neurocognitive adverse events across the global development program
for alirocumab, especially in long-term studies. While results on
PCSK9 inhibitors in development have been encouraging so far, this
is the first time that serious safety concerns have been
raised.
ABBVIE INC (ABBV): Free Stock Analysis Report
ABBOTT LABS (ABT): Free Stock Analysis Report
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AMGEN INC (AMGN): Free Stock Analysis Report
ASTRAZENECA PLC (AZN): Free Stock Analysis Report
BAYER A G -ADR (BAYRY): Free Stock Analysis Report
BIOGEN IDEC INC (BIIB): Free Stock Analysis Report
BIOMARIN PHARMA (BMRN): Free Stock Analysis Report
CUBIST PHARM (CBST): Free Stock Analysis Report
CELGENE CORP (CELG): Free Stock Analysis Report
CHELSEA THERAP (CHTP): Free Stock Analysis Report
FOREST LABS A (FRX): Free Stock Analysis Report
GLAXOSMITHKLINE (GSK): Free Stock Analysis Report
HORIZON PHARMA (HZNP): Free Stock Analysis Report
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LILLY ELI & CO (LLY): Free Stock Analysis Report
MANNKIND CORP (MNKD): Free Stock Analysis Report
MERCK & CO INC (MRK): Free Stock Analysis Report
MYLAN INC (MYL): Free Stock Analysis Report
NOVARTIS AG-ADR (NVS): Free Stock Analysis Report
ONCOMED PHARMA (OMED): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
PERRIGO CO PLC (PRGO): Free Stock Analysis Report
REGENERON PHARM (REGN): Free Stock Analysis Report
SALIX PHARM-LTD (SLXP): Free Stock Analysis Report
SANOFI-AVENTIS (SNY): Free Stock Analysis Report
VANDA PHARMACT (VNDA): Free Stock Analysis Report
VERTEX PHARM (VRTX): Free Stock Analysis Report
DENTSPLY INTL (XRAY): Free Stock Analysis Report
ZOETIS INC (ZTS): Free Stock Analysis Report
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