The pharmaceutical industry is slowly 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 will be
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.
The M&A activity witnessed in the pharma sector in the last
couple of years continued in 2012, in-line with expectations. Major
deals so far in 2012 include
Johnson & Johnson's
) acquisition of Synthes, Bristol-Myers Squibbs' acquisition of
Amylin Pharmaceuticals, Inc.,
) acquisition of Human Genome Sciences and
) upcoming acquisition of
Meanwhile, generic players are not far behind in the acquisition
) acquired Cephalon, Inc.,
) acquired 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
pipeline. Meanwhile, AstraZeneca (
) acquired biotech company Ardea Biosciences.
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 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 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
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 August 2011 and November 2012,
respectively. 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.
) will be splitting into two separate publicly traded companies by
year end. 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 on 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.
The US government is also 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 establishment of a biosimilar
pathway will lead to the availability of cheaper versions of
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 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.
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 a 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.
Mixed Performance in the Third Quarter
Despite facing challenges like EU austerity measures,
genericization, lower-than-expected contributions from new
products, companies like Sanofi, Merck and Pfizer delivered
stronger-than-expected results. However, companies like Eli Lilly,
Bristol-Myers and Glaxo missed the Zacks Consensus Estimate. Both
Eli Lilly and Bristol-Myers are facing stiff generic competition
for their key products.
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 Sanofi, Johnson &
Johnson, and Amgen could beat the Zacks Consensus Estimate in the
fourth quarter of 2012. Johnson & Johnson, Biogen and Amgen
have raised their outlook for 2012.
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 #2 Rank (Buy) stocks in the pharma sector include
Johnson & Johnson
), among others.
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.
We are also positive on
). We are encouraged by the company's performance so far this year.
Enbrel should continue performing well. Amgen's late-stage pipeline
is also moving along. Amgen is a Zacks #1 Rank (Strong Buy) stock.
Among generic companies, both
) carry a Zacks #2 Rank. While Watson should benefit from its
acquisition of Actavis, we are encouraged by Mylan's geographic
reach and product depth along with a robust generic product
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.
) carry a Zacks #3 Rank (Hold), we remain concerned about the
headwinds being faced by these companies in the form of generic
competition and slow ramp up of new products.
Companies that currently carry a Zacks #4 Rank (Sell) include
), among others.
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