The pharmaceutical industry is in the midst of one of the
biggest patent cliffs with
) multi-billion-dollar blockbuster drug Lipitor losing patent
protection in the US in late November 2011. Besides Lipitor, other
major branded drugs that lost patent protection in the past few
) Plavix and
These products alone represented branded sales worth more than
$15 billion. Another product that will start facing generic
competition shortly is
) blockbuster Singulair.
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The effect of the genericization of these products will be felt
mostly in 2012, which will be a challenging year for several
companies. While generics will eat into sales, new products are not
expected to generate the same level of sales as products losing
patent protection. The next few years are expected to reflect a
significant imbalance between new product introductions and patent
Generic competition and insufficient new product sales are not the
only factors impacting performance in 2012. Other headwinds include
EU and Japan pricing pressure as well as negative currency
movement. In fact, results of several companies including
Johnson & Johnson
) were hit by negative currency movement in the June quarter.
Meanwhile, the US government is exploring options which will help
increase the availability of generics. The Obama administration
announced that it is looking to implement a proposal under which
the exclusivity period for biologics will be cut down by 5 years,
thereby allowing generics to enter the market sooner.
The government is also seeking to increase the availability of
generics by preventing companies from entering into
anti-competitive or "pay for delay" agreements which push out the
availability of generics. These initiatives, if implemented, would
result in additional pricing competition and genericization in the
pharma industry. Moreover, the FDA is working on establishing a
biosimilar pathway so that cheaper versions of biologics will be
With revenue growth stalling or slowing down, pharma companies have
been resorting to cost-cutting and share buybacks to drive
bottom-line growth. Mergers & acquisitions (M&As),
licensing deals, restructuring, share buybacks and monetization of
non-core assets have become recurring events in the pharma and
biotech sector over the past few quarters.
The M&A activity witnessed in the pharma sector in the last
couple of years has continued in 2012, in-line with expectations.
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&A and in-licensing
activities to make up for the loss of revenues resulting from the
loss of patent exclusivity of key products.
Major deals so far in 2012 include Johnson & Johnson's
acquisition of Synthes, which should help strengthen its medical
device portfolio, Bristol-Myers Squibbs' upcoming acquisition of
Amylin Pharmaceuticals, Inc.
) upcoming acquisition of
Human Genome Sciences
Bristol-Myers has been pretty active on the acquisition front. The
company has been looking to expand via acquisitions and
partnerships to counter the loss of revenues arising from the
genericization of blockbuster blood thinner Plavix. The Amylin
acquisition should allow the company to expand its presence in the
lucrative diabetes market.
The Amylin deal is the second major deal for Bristol-Myers this
year, with the company having purchased Inhibitex, Inc., for $2.5
billion in February, thereby targeting the lucrative hepatitis C
virus (HCV) market.
Oncology also remains a much sought-after therapeutic area, with
companies like Sanofi and
) strengthening their presence in this market through acquisitions.
Meanwhile, generic players are not far behind in the acquisition
) acquired Cephalon, Inc.,
) acquired generic company Specifar Pharmaceuticals to expand and
strengthen its presence in Europe. Watson recently announced its
intention to acquire generic player, Actavis.
Elsewhere, companies have been looking toward biotech firms to
build their product portfolios. A prime example is French pharma
giant Sanofi's acquisition of biotech company Genzyme Corp. The
Genzyme acquisition has boosted Sanofi's revenues as well as its
) acquired biotech company Ardea Biosciences. Another acquisition
deal announced in April 2012 is
) upcoming acquisition of biopharma company
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
and time, 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 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
HCV market is also attracting a lot of attention.
Another trend that we are seeing lately is the divestment of
non-core business segments. Pfizer sold its Capsugel unit in August
2011 and signed a deal for the divestment of its Nutrition business
in April 2012. The company intends to spin-off its Animal Health
business as well.
Meanwhile, GlaxoSmithKline is divesting non-core brands from its
Consumer Healthcare segment. In August 2011, AstraZeneca 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.
2012 will see Abbott Labs splitting into two separate publicly
traded companies. While one company will deal in diversified
medical products, the other (AbbVie) will focus on research-based
A major event that will have a significant impact pharma and
biotech stocks is the upholding of the Patient Protection and
Affordable Care Act (ACA) by the Supreme Court in late June 2012.
The Act, popularly referred to as "Obamacare," passed through
Congress in 2010, represents major changes in the nation's
The Act will provide coverage to 32 million uninsured Americans,
make healthcare facilities more affordable, expand coverage for
customers with pre-existing health conditions and keep a check on
health insurers. The healthcare reform aims to end the
discrimination policy of insurance companies, create competition
amongst insurers through the establishment of health insurance
exchanges, add value to the overall healthcare system and reduce
The upholding of the Act is a big win for pharma companies as the
coverage base will increase.
Meanwhile, the signing of the Gaining Antiobiotic Incentives Now
(GAIN) Act should benefit companies pursuing the development of
novel antibiotics. Once approved, these products will enjoy an
additional five years of marketing exclusivity. Companies that
should benefit from this Act include
The Medicines Company
) among others.
Another important event in the past few weeks was the signing of
the Food and Drug Administration Safety and Innovation Act (FDASIA)
of 2012. This new law includes the reauthorization of the
Prescription Drug User Fee Act (PDUFA), under which the FDA is
provided with funds and resources needed to ensure the smooth and
timely review of drugs.
Another recent 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. 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. According to the IMS
Institute, growth in Europe will range from negative 1% to positive
2%. The Japanese market is expected to grow at a slower pace
annually (1-4%) through 2016 compared to the last five years.
We continue to have a Neutral outlook on large-cap pharma stocks.
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.
A few years down the line, the pharma industry should demonstrate
signs of recovery. The industry should be out of the major patent
cliff period, and new products should be contributing significantly
to results. Increased pipeline visibility and appropriate
utilization of cash should increase confidence in the sector.
In the biotech space, we are positive on
). We are optimistic on BG-12, the company's oral multiple
sclerosis candidate. Key products Avonex and Tysabri should
continue contributing significantly to sales. Biogen's second
quarter results were impressive and the company increased its
guidance for 2012.
We are also positive on
). We are encouraged by the company's first half 2012 performance.
Enbrel should continue performing well and Xgeva/Prolia should
continue responding positively to the company's increased marketing
efforts like DTC advertising. Amgen's late-stage pipeline is also
Another company that delivered a solid performance in the June
). In addition to reporting a profit for the first time, the
company increased its guidance. We expect the company's
hypogonadism product, Testim, to continue performing well
especially with the additional promotional effort from Glaxo.
Among generic companies, both
) carry a Zacks #2 Rank (short-term Buy rating). While Watson
should benefit from its upcoming acquisition of Actavis, which
should be immediately accretive, we are encouraged by Mylan's
geographic reach and product depth along with a robust generic
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 #5 Rank (short-term Strong Sell rating). The
company's second quarter loss per share was wider than expected
mainly due to revenues coming in below expectations. Moreover,
expectations from pipeline candidate bapineuzumab (Alzheimer's) are
pretty low, with the candidate failing to meet its primary endpoint
in one of four phase III studies.
Companies that currently carry a Zacks #4 Rank (short-term Sell
). Both Glaxo and AstraZeneca presented weak second quarter
results. Factors like generic competition, EU pricing pressure and
negative currency movement will continue impacting the performances
of these companies.
We are also concerned about the prospects of
Cardiome Pharma Corp.
) which carries a Zacks #4 Rank (short-term Sell rating). The
company recently announced a major reduction in its workforce
following Merck's decision to discontinue the development of an
oral formulation of vernakalant. Merck and Cardiome were studying
the candidate as a maintenance therapy for the long term prevention
of atrial fibrillation recurrence.
The discontinuation of the development of oral vernakalant is a
huge setback for Cardiome. The company has a weak pipeline
consisting of a few early stage projects. We expect the shares to
remain under pressure until the company provides a strategic
The FDA has some major decisions coming up in the next few months.
Some of the most interesting candidates currently under review
include Medivation's (
) enzalutamide (oncology), Biogen Idec's BG-12 (multiple
) oral Remodulin (treatment of pulmonary arterial hypertension),
) Quad pill (HIV), and Forest Labs' linaclotide
(constipation-predominant irritable bowel syndrome and chronic
) regorafenib (oncology) among others.
Important product approvals in the last few quarters include
Johnson & Johnson's prostate cancer therapy Zytiga, Merck's HCV
treatment Victrelis, Bristol-Myers' melanoma treatment Yervoy,
) HCV treatment Incivek, Pfizer's lung cancer treatment Xalkori,
and Glaxo/Human Genome's lupus drug Benlysta, among others.
Potential blockbusters include Benlysta, Yervoy, Zytiga, Incivek