Pharma & Biotech Stock Outlook - Dec 2013 - Industry Outlook
December 03 2013 - 4:28AM
Zacks
With 2013 coming to an end, the worst of the patent cliff faced by
the pharmaceutical sector is over. Major blockbuster drugs like
Merck’s (MRK) Singulair,
Pfizer’s
(PFE) Lipitor,
Forest Laboratories’ (FRX) Lexapro,
Sanofi/
Bristol-Myers Squibbs’
(SNY/BMY) Plavix and
Eli Lilly’s (LLY) Zyprexa
representing combined branded sales worth more than $15 billion in
lost patent protection over the last couple of years.
However, the effect of the genericization of these products was
felt mostly in 2012. While the industry won’t be completely free
from genericization, the major patent expiries are over and done
with.
Several companies which had been struggling to post growth in
the face of genericization over the past few years should see
accelerated growth in 2014. New products should start contributing
significantly to results and increased pipeline visibility and
appropriate utilization of cash should increase confidence in the
sector.
Some products that are slated to lose patent protection later this
year and next year include:
![](http://static.zacks.com/images/zacks/blogs/1386091328_scaled_425.jpg)
AstraZeneca’s (AZN) Nexium could also start facing
generics from 2014 in the U.S., where sales were $2.2 billion in
2012.
Collaborations, Acquisitions and Restructuring
The pharma sector witnessed major merger and acquisitions (M&A)
activity over the last couple of years. The trend continued this
year and 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 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) upcoming acquisition of ViroPharma (VPHM),
Salix’s (SLXP) upcoming acquisition of
Santarus (SNTS) as well as the acquisition of
Optimer Pharmaceuticals and Trius Therapeutics by Cubist
Pharmaceuticals (CBST). Elan (ELN) is
also on track to be acquired by Perrigo Company
(PRGO) by year's end.
Another trend that we are seeing in recent months is the divestment
of non-core business segments. Pfizer 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) also announced its plans to explore
strategic alternatives for its ortho-clinical diagnostics business,
including a possible divestiture. Vertex (VRTX)
monetized its Incivo-related royalties -- Vertex 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, Novartis (NVS), Eli Lilly, Shire
and Sanofi.
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. market -- 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 from 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 (ACT) are all targeting the highly
lucrative biosimilars market.
3Q Earnings
All companies falling under the Medical sector have reported third
quarter 2013 results. While earnings-beat and revenue-beat ratios
(percentage of companies coming out with positive surprises) were
pretty impressive, growth ratios were modest. Third quarter results
were characterized by currency headwinds especially in Japan as
well as a slowdown in China where bribery investigations remained
in the headlines.
Third quarter 2013 earnings "beat ratio" was 74.5% while the
revenue "beat ratio" was 51.0%. Total earnings for this sector were
up 0.2%, compared to the 1.5% decline recorded in the second
quarter of 2013. Total revenues moved up 5.8% in the quarter versus
2.4% growth in the second quarter of 2013.
Looking at the consensus earnings expectations for the fourth
quarter, earnings are expected to decline 3.5%. Tough challenges
for some companies, negative currency movement and a few patent
expiries will affect fourth quarter growth. With the year coming to
an end, several companies maintained or narrowed their guidance
ranges.
Overall, 2013 earnings are expected to grow 0.6%.
Focus on New Products
2012 saw the FDA approving 35 novel medicines including the
following:
![](http://static.zacks.com/images/zacks/blogs/1386091350_scaled_425.jpg)
Most of these products have been performing well so far in 2013.
Stivarga, Kalydeco, Xtandi and Kyprolis, especially, represent
strong commercial potential.
So far in 2013, quite a few important products have gained approval
including Biogen’s oral multiple sclerosis drug Tecfidera, Johnson
& Johnson’s type II diabetes drug Invokana, Merck’s Liptruzet
(cholesterol), Forest’s Fetzima (major depressive disorder),
Pharmacyclics (PCYC)/Johnson & Johnson’s
Imbruvica (mantle cell lymphoma) and Roche’s
(RHHBY) Gazyva (chronic lymphocytic leukemia). Biogen’s Tecfidera
is off to a strong start with sales surpassing expectations by a
wide margin.
Upcoming events include FDA advisory panel reviews of the biologic
licensing application (BLA) for Bristol-Myers Squibbs’ metreleptin
(rare forms of lipodystrophy) and dapagliflozin (type II diabetes),
and Merck’s Grastek (a Timothy grass pollen extract tablet for
sublingual use). All these reviews are scheduled to take place in
the Dec 11 - 12 timeframe.
A response on the approval status of Auxilium
Pharma’s (AUXL) Xiaflex for Peyronie’s and Gilead’s
sofosbuvir (chronic HCV infection) in the U.S. should also be out
in December.
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 #95,
med-biomed/gene is #77, med-drugs is #66, while the med-generic
drugs is #40. 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 Neutral for
large-cap pharma stocks.
OPPORTUNITIES
The outlook for the pharma sector has improved significantly with
the Zacks Industry Rank moving up from #195 to #95 over the past
few months. While several companies will continue to face
challenges like EU austerity measures and genericization, the
pharma industry is out of the worst of the genericization
phase.
Many companies which had faced generic headwinds in the last
couple of years should continue to see a sustained improvement in
results as we move into 2014. Cost-cutting, downsizing,
streamlining of the pipeline, growth in emerging markets and new
product launches should support growth.
Among large-cap pharma stocks, Bayer (BAYRY), a
Zacks Rank #2 (Buy) stock, looks well-positioned with several new
products -- Eylea, Stivarga and Xarelto -- in its portfolio. These
products represent significant commercial potential.
Forest Labs (FRX), another Zacks Rank #2 stock, is
doing well with first half fiscal 2014 results beating
expectations. The company has launched several new products over
the past few quarters and continues to work on expanding its
pipeline. This company also raised its earning guidance for fiscal
2014.
Shire (SHPG), a Zacks Rank #1 (Strong Buy) stock,
looks well-positioned for growth with the company expanding its
product portfolio and pipeline through the upcoming acquisition of
ViroPharma.
We are positive on Johnson & Johnson (JNJ)
even though the company currently holds a Zacks Rank #3 (Hold). The
company has performed well so far this year and the momentum should
continue. Johnson & Johnson upped its 2013 earnings guidance
again after announcing third quarter results.
The company has been trying to offset the declining sales of
some of its important products by bringing in new products through
in-licensing deals and acquisitions. We believe the diversity and
strength of the company’s underlying businesses will continue to
provide strong growth in future.
In the biotech space, we are positive on Biogen
(BIIB). Tecfidera, the company’s recently launched oral multiple
sclerosis drug, is off to a strong start with the product
delivering sales of $478 million since its launch in early April.
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 should gain EU
approval shortly. Biogen is also progressing with its hemophilia
pipeline. Biogen is another company that raised its 2013 guidance
again this year.
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 #3 stock, continues to do well in the HIV segment and is
also progressing with its HCV pipeline.
Medivation (MDVN), a Zacks Rank #2 company, should
continue delivering with its prostate cancer therapy, Xtandi,
performing well. Based on the data we have seen so far, we believe
Xtandi has blockbuster potential. It is currently in several
studies including for the pre-chemo setting. Expansion into the
pre-chemo setting would be a major positive for Medivation.
Vanda Pharmaceuticals, Inc. (VNDA) also looks
well-positioned with the company receiving a positive feedback from
the FDA regarding insomnia candidate, tasimelteon. The FDA’s
advisory panel voted resoundingly in favor of approving the
candidate for the treatment of Non-24-Hour Disorder in the totally
blind. While the FDA is not required to follow the advice of its
advisory panel, it usually does so. A response from the agency
should be out by Jan 31, 2014. Vanda is a Zacks Rank #1 stock.
Among generic companies, Actavis (ACT) looks
well-positioned. We view the acquisition of Actavis Group as a
smart strategic move and we believe the company will be able to
achieve its guidance easily. We are also positive on the recent
acquisition of Warner Chilcott, which makes strategic and financial
sense. 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. The FDA has been
exercising more caution in granting approval to new products and
several candidates are facing delays in receiving final
approval.
Among large-cap pharma companies, Eli Lilly (LLY)
is gearing up for another round of patent expiries: Cymbalta in Dec
2013 and Evista next 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
Alkermes (ALKS), BioLineRx, Ltd.
(BLRX) and XOMA Corporation (XOMA) among
others.
ABBVIE INC (ABBV): Free Stock Analysis Report
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