Pharma & Biotech Stock Outlook - Apr 2013 - Zacks Analyst Interviews
April 03 2013 - 10:04PM
Zacks
The pharmaceutical industry has been showing signs of recovery from
one of the biggest patent cliffs in recent times. The last few
quarters saw major blockbusters like
Merck’s (MRK)
Singulair,
Pfizer’s (PFE) Lipitor,
Forest
Laboratories’ (FRX) Lexapro,
Sanofi/Bristol-Myers’ (SNY/BMY) Plavix and
Eli Lilly’s (LLY) Zyprexa losing patent
protection. These products alone represented branded sales worth
more than $15 billion.
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. 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 in 2013
include:
Collaborations and Acquisitions
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.
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 and time, pharma companies are shopping for mid-to-late
stage pipeline candidates that look promising.
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 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. The hepatitis C virus (HCV) market is also
attracting a lot of attention.
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.
Earlier this year, the company’s Animal Health business started
trading separately.
Meanwhile, GlaxoSmithKline (GSK) divested certain
non-core brands from its Consumer Healthcare segment. In Aug 2011,
AstraZeneca (AZN) 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 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.
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 US -- 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.
According to the IMS Institute, spending on medicines in
"pharmerging" markets will almost double to $345 billion - $375
billion in five years from $194 billion in 2011.
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.
Meanwhile, according to the IMS Institute, annual growth in the
branded medicines market will remain flat or increase up to 3% to
$615 billion - $645 billion through 2016 from $596 billion in
2011.
As far as developed nations are concerned, the IMS Institute
expects US spending to go up by $35 billion - $45 billion (1-4%) in
the next five years (from 2011). The introduction of medicines
targeting unmet needs and higher patient access resulting from
Obamacare are expected to drive growth.
However, 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),
Actavis (ACT) and Teva (TEVA) are
all targeting the highly lucrative biosimilars market.
A Look at Fourth Quarter Results
Despite facing challenges like EU austerity measures,
genericization and lower-than-expected contributions from new
products, companies like Eli Lilly, Bristol-Myers Squibbs, Merck,
and Pfizer delivered stronger-than-expected results. However,
companies like Amgen, Glaxo, and Forest Labs missed the Zacks
Consensus Estimate.
While guidance provided by Johnson & Johnson and Merck lagged
expectations, Amgen and Eli Lilly provided an encouraging
outlook.
A look at the Earnings ESP (Expected Surprise Prediction - Zacks'
proprietary methodology for determining which stocks have the best
chance to surprise with their next earnings announcement) in the
table below shows that companies like Pfizer, Biogen, Teva,
Actavis, Celgene (CELG) and Bristol-Myers Squibb could beat the
Zacks Consensus Estimate in the first quarter of 2013. Meanwhile,
Johnson & Johnson, Gilead, Amgen, Allergan and Mylan are likely
to deliver below expectations.
Major Product Approvals in 2012
Most of these products should be major contributors to the
top-line in 2013. Stivarga, Kalydeco, Xtandi and Kyprolis,
especially, represent strong commercial potential.
Meanwhile, key regulatory decisions expected this year include a
response regarding the approvability of Forest Labs’
levomilnacipran (depression) and cariprazine (schizophrenia and
bipolar mania), Merck’s Atozet (primary or mixed hyperlipidemia)
and Biogen’s rFIXFc (hemophilia B) among others. Biogen’s oral
multiple sclerosis drug, Tecfidera, and Johnson & Johnson’s
type II diabetes drug, Invokana, gained FDA approval last week.
OPPORTUNITIES
We continue to have a Neutral outlook on large-cap pharma stocks.
While the companies will continue to face challenges like EU
austerity measures and genericization, the pharma industry should
be out of the worst of the genericization phase from 2013.
Several companies which had faced generic headwinds in the last
couple of years should see their results recover from 2013.
Cost-cutting, downsizing, streamlining of the pipeline, growth in
emerging markets and product approvals should support growth.
Zacks Rank #2 (Buy) stocks in the pharma sector include Eli
Lilly (LLY) and Novo Nordisk (NVO), among
others. Despite the presence of generic competition for key
products, share buybacks and cost control should help Eli Lilly
achieve its 2013 guidance.
In the biotech space, we are positive on Biogen
(BIIB). We are optimistic on Tecfidera, the company’s oral multiple
sclerosis drug which gained approval last week. Key products,
Avonex and Tysabri, should continue contributing significantly to
sales. The company is also progressing with its hemophilia
pipeline.
We are also positive on Amgen (AMGN). Amgen’s 2013
guidance was above expectations. The company also provided an
update on its long-term strategy. 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.
Both Biogen and Amgen are Zacks Rank #2 stocks. Gilead, another
Zacks Rank #2 stock, continues to do well in the HIV segment.
Osiris Therapeutics (OSIR), a stem cell company,
currently carries a Zacks Rank #1 (Strong Buy). Prochymal’s
approval in Canada and New Zealand were major milestones for the
company. Meanwhile, the Biosurgery segment is also gaining
traction. A partnership deal for Prochymal would be a major boost
for the stock.
Among generic companies, Mylan carries a Zacks Rank #2. We are
encouraged by Mylan’s geographic reach and product depth and robust
generic product pipeline.
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.
Although Forest Labs (FRX) carries a Zacks Rank #3
(Hold), we remain concerned about the headwinds being faced by the
company in the form of generic competition and slow ramp up of new
products.
Companies that currently carry a Zacks Rank #4 (Sell) include
Affymax, Inc. (AFFY), Protalix
BioTherapeutics (PLX), Elan Corp (ELN)
and Jazz Pharmaceuticals (JAZZ) among others.
Affymax is currently evaluating strategic options like a sale,
merger, restructuring, wind-down of operations and filing for
bankruptcy. The company took this decision after it recalled all
lots of Omontys (peginesatide) voluntarily along with its partner
Takeda Pharmaceutical Co. (TKPYY) in Feb 2013.
ABBOTT LABS (ABT): Free Stock Analysis Report
BRISTOL-MYERS (BMY): Free Stock Analysis Report
CELGENE CORP (CELG): Free Stock Analysis Report
GILEAD SCIENCES (GILD): 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
DENTSPLY INTL (XRAY): Free Stock Analysis Report
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