With 2013 coming to an end, the worst of the patent cliff faced
by the pharmaceutical sector is over. Major blockbuster drugs like
) Plavix and
(LLY) Zyprexa representing combined branded sales worth more than
$15 billion in lost patent protection over the last couple of
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
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
Some products that are slated to lose patent protection later this
year and next year include:
) 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
) upcoming acquisition of
) upcoming acquisition of
) as well as the acquisition of Optimer Pharmaceuticals and Trius
) is also on track to be acquired by
) 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,
) divested certain non-core brands from its Consumer Healthcare
segment. In Aug 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.
) split into two separate publicly traded companies; while one
company deals in diversified medical products, the other,
), 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
) 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
), Eli Lilly, Shire and Sanofi.
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 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
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,
) are all targeting the highly lucrative biosimilars market.
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
Overall, 2013 earnings are expected to grow 0.6%.
Focus on New Products
2012 saw the FDA approving 35 novel medicines including the
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),
)/Johnson & Johnson's Imbruvica (mantle cell lymphoma) and
) Gazyva (chronic lymphocytic leukemia). Biogen's Tecfidera is off
to a strong start with sales surpassing expectations by a wide
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
) 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.
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
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,
), 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.
), 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.
), 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
) 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
). 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 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.
), 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.
) 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
Among generic companies,
) 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
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,
) 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
Companies that currently carry a Zacks Rank #4 (Sell) include
) among others.
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