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
) Plavix and
) 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
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
) divested certain non-core brands from its Consumer Healthcare
segment. In Aug 2011,
) sold its Astra Tech business to
). The monetization of non-core assets will allow the
pharma/biotech companies to focus on their areas of expertise.
) 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
) also announced its plans to explore strategic alternatives for
its ortho-clinical diagnostics business, including a possible
Emerging Markets and Biosimilars
Another trend seen in the pharmaceutical sector is a focus on
emerging markets. Companies like
), 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,
) 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
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 (
) 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
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.
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
), 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
). 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
We are also positive on
). 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.
), 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.
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.
) 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
) 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
Takeda Pharmaceutical Co.
) in Feb 2013.
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