Challenges like sluggish prescription trends, EU pricing pressure,
intensifying generic competition, pipeline failures and limited
late-stage catalysts continue to impact the pharmaceutical
industry. The next five years are expected to reflect a significant
imbalance between new product introductions and patent losses.
All these factors will lead to a slowdown in global pharmaceutical
market growth in the next five years. Products like Lipitor,
Plavix, Lexapro and Zyprexa are expected to face generic
competition over the next five years.
In fact, 2011 itself will see drugs worth more than $30 billion
losing patent protection. This includes drugs like Lipitor, Zyprexa
and Levaquin. The effect of the genericization of these products
will be felt mostly in 2012, which will be a challenging year for
several companies.
At the same time, new products are not expected to generate the
same level of sales as products losing patent protection. With
revenue growth stalling or slowing down, companies have been
resorting to cost-cutting and share buybacks to drive bottom-line
growth.
M&A Activity
The pharma sector continued to witness major merger and acquisition
(M&A) deals in 2010. With most of the big pharma companies
already facing or likely to face patent challenges for their
blockbuster products, the companies have been looking toward
M&As and in-licensing activities to make up for the loss of
revenues that will arise with key products losing patent
exclusivity.
The trend continues in 2011 with several major acquisitions being
announced so far. We saw huge M&A activity over the last few
months. Major deals include
Johnson &
Johnson's (JNJ) acquisition of Dutch biopharmaceutical
company Crucell NV. This acquisition should not only help
strengthen Johnson & Johnson's portfolio, it should also allow
the company to build its presence in the vaccines market, given
Crucell's expertise in the manufacture, discovery and
commercialization of vaccines.
Meanwhile, Japanese company Takeda is looking to expand its global
presence through its upcoming acquisition of Nycomed. Pharma giant
Pfizer (PFE) acquired King Pharmaceuticals to
strengthen its presence in the pain management market.
Merck (MRK) is looking to expand its ophthalmology
product portfolio through its acquisition of Inspire
Pharmaceuticals, Inc.
Oncology also remains a much sought-after therapeutic area with
companies like
Sanofi-Aventis (SNY) and
Celgene (CELG) strengthening their presence in
this market through acquisitions. Meanwhile, generic players are
not far behind in the acquisition game. While
Teva
(TEVA) announced its intention to acquire
Cephalon,
Inc. (CEPH), Watson Pharmaceuticals (WPI) acquired generic
company Specifar Pharmaceuticals to expand and strengthen its
presence in Europe.
The Cephalon deal is in-line with Teva's long-term strategy of
expanding and strengthening its branded and specialty pharma
business.
Elsewhere, companies have been looking toward biotech firms to
build their product portfolios. A prime example is French pharma
giant Sanofi-Aventis' acquisition of biotech company Genzyme Corp.
With this acquisition, Sanofi is looking to create a new source of
growth. The Genzyme acquisition will boost Sanofi's revenues as
well as its pipeline.
In April 2011,
Gilead Sciences, Inc. (GILD)
acquired biotechnology firm Calistoga Pharmaceuticals, which
focuses on developing therapies to combat cancer and inflammatory
diseases.
Going forward, we expect the M&A trend to continue. We also
expect a significant pickup in in-licensing activities and
collaborations for the development of pipeline candidates. Instead
of developing a product from scratch, which involves a lot of
funds, pharma companies are shopping for mid-to-late stage pipeline
candidates that look promising.
Small biotech companies are also game for 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 would recommend investors to put their money in 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 oncology,
central nervous system disorders, diabetes and
immunology/inflammation.
Emerging Markets
Another recent trend seen in the pharmaceutical sector is a focus
on emerging markets. Companies like
Mylan (MYL),
Pfizer, Merck,
Eli Lilly (LLY),
GlaxoSmithKline (GSK) and Sanofi-Aventis 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 US market -- the largest pharmaceutical
market -- along with Europe and Japan.
However, emerging markets are slowly and steadily gaining more
importance, and several companies are now shifting their focus to
these areas. Emerging markets should see strong sales thanks to
higher demand for medicines. Several factors like government
initiatives for healthcare, new patient population, and increasing
use of generics should help drive demand. Growth in emerging
markets could help stabilize the base business during the
industry's 2010-15 patent cliff.
According to the IMS Institute, spending on medicines in
pharmerging markets will double to $285-$315 billion in the next
five years from $151 billion in 2010. This will catapult
"pharmerging" markets to the second position where spending on
medicines is concerned.
Branded Drugs Market Share to Decline
According to the IMS Institute, market share for branded drugs will
continue declining in the next five years. Branded drugs market
share, which declined from 70% in 2005 to 64% in 2010, is expected
to decline to 53% by 2015. The decline will be driven by patent
expiries, with generics accounting for a significant part of pharma
spending. Spending on branded medicines in 2015 is expected to
remain at the same level as in 2010.
While the US will witness a major increase in generic spending,
generic spending in Japan will continue to be the lowest even
though significant efforts are being made to increase the use of
generics in Japan. Overall spending in generics is expected to
increase from 20% in 2005 to 39% in 2015.
Global spending for medicines is expected to reach almost $1.1
trillion by 2015, according to the IMS Institute. However, the
five-year compound annual growth rate of 3-6% represents a
significant slowdown from the 6.2% annual growth seen in the last
five years.
Moreover, the US's share of global spending is expected to decline
from 41% in 2005 to 31% in 2015. The share of spending from the top
5 European countries is also expected to decline (from 20% in 2005
to 13% in 2015) with spending by pharmerging markets expected to
increase from 12% in 2005 to 28% by 2015.
(Source of growth forecasts: IMS)
OPPORTUNITIES
We currently have a neutral outlook on large-cap pharma stocks
(Zacks #3 Rank). While the companies will continue to face
challenges like pricing pressure and genericization, growth in
emerging markets and product approvals could help reduce the
impact.
According to the IMS Institute, 44 new branded products were
launched in 2010. However, the new product approval mix was more
towards orphan drugs and medicines with the same mechanism of
action as existing treatments. While 10 products represented new
mechanisms of action, five orphan drugs and six new chemical
entities using existing mechanisms were approved.
Important product approvals in 2011 so far include the approval of
Johnson & Johnson's prostate cancer therapy, Zytiga, Merck's
hepatitis C virus (HCV) treatment, Victrelis,
Bristol-Myers
Squibb's (BMY) melanoma treatment, Yervoy, and
Vertex Pharma's (VRTX) HCV treatment, Incivek,
among others.
We currently have Neutral recommendations on companies like
Abbott Labs (ABT),
Allergan Inc.
(AGN) and Pfizer. We believe that Allergan's presence across
different segments and geographies will help maintain decent growth
going forward. We believe the company will be back on its
historical mid-to-high teens earnings growth trajectory from
2011.
In the biotech space, we are positive on
Biogen
Idec (BIIB). Biogen started 2011 on a strong note with
revenues being driven by Tysabri and Avonex. Earnings estimates for
Biogen have been increasing based on continued strong performance
of the multiple sclerosis franchise. Longer term, we are optimistic
on BG-12, the company's oral multiple sclerosis candidate.
We currently have an Outperform recommendation on
Perrigo
Company (PRGO) -- we believe Perrigo's strong position in
the brand OTC pharmaceutical market and growing generics and API
businesses will help it deliver solid top- and bottom-line growth
in the coming years. Perrigo also has a very strong and impressive
pipeline which could drive growth in fiscal 2012 and beyond.
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. The US Food and Drug
Administration (FDA) has been exercising more caution in granting
approval to new products and several candidates have been facing
delays in receiving final approval.
We would also avoid companies like
Eli Lilly
(LLY), which is facing patent expirations on key products and whose
new products may not be enough to make up for the loss of revenues
that will take place once generics enter the market.
2011 will be a challenging year for Eli Lilly with the company
losing patent exclusivity on Zyprexa. Zyprexa sales should erode
rapidly with the entry of generics. Moreover, we expect continued
erosion of Gemzar sales due to genericization. Another company that
is highly exposed to a patent cliff is
Forest Labs
(FRX).
ABBOTT LABS (ABT): Free Stock Analysis Report
ALLERGAN INC (AGN): Free Stock Analysis Report
BIOGEN IDEC INC (BIIB): Free Stock Analysis Report
BRISTOL-MYERS (BMY): Free Stock Analysis Report
CELGENE CORP (CELG): Free Stock Analysis Report
CEPHALON INC (CEPH): Free Stock Analysis Report
GLAXOSMITHKLINE (GSK): Free Stock Analysis Report
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
LILLY ELI & CO (LLY): Free Stock Analysis Report
MERCK & CO INC (MRK): Free Stock Analysis Report
MYLAN INC (MYL): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
SANOFI-AVENTIS (SNY): Free Stock Analysis Report
TEVA PHARM ADR (TEVA): Free Stock Analysis Report
VERTEX PHARM (VRTX): Free Stock Analysis Report
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