The pharmaceutical industry has been showing signs of recovery
from one of the biggest patent cliffs in recent times. Major
blockbuster drugs like
) Plavix and
) Zyprexa lost patent protection in the last few quarters. These
products alone represented branded sales worth more than $15
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 lost or are slated to lose patent protection in
Collaborations, Acquisitions and Restructuring
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. 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 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
A couple of biotech companies that have been in the news recently
due to acquisition rumors/talks are
). Onyx has placed itself on the market after turning down an offer
from biotech major, Amgen (AMGN). Meanwhile,
) is rumored to be interested in Alexion.
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. More
recently, Pfizer spun off its animal health business into a new
) 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,
), 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 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.
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.
So far, 51.1% of the companies falling under the Medical sector
have reported second quarter 2013 results. While earnings-beat
ratios (percentage of companies coming out with positive surprises)
were pretty impressive, revenue-beat ratios and growth ratios were
To date, second quarter 2013 earnings "beat ratio" was 70.8% while
the revenue "beat ratio" was 29.2%. Total earnings for this sector
were up 1.9%, below the 3.0% growth recorded in the first quarter
of 2013. Total revenues moved up 4.1% in the quarter versus 10.7%
growth in the first quarter of 2013.
Looking at the consensus earnings expectations for the rest of the
year, earnings are expected to decline 3.6% in the third quarter
and grow 1.2% in the fourth quarter. Overall, 2013 earnings are
expected to decline 0.2%.
This is mainly due to weakness in the pharma industry which
accounts for about two-thirds of the sector's total earnings. Tough
comparisons at Pfizer, Merck and others tell the pharmaceutical
industry's earnings growth challenge. Both Pfizer and Merck are
facing generic competition for key products.
For a detailed look at the earnings outlook for the Medical and
other sectors, please check our weekly
Zacks Earnings Trends
Focus on New Products
2012 saw the FDA approving 35 novel medicines including the
Most of these products should be major contributors to the top-line
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
Forest's Fetzima (major depressive disorder). Biogen's Tecfidera is
off to a strong start with its launch -- quarter sales are
surpassing expectations by a wide margin.
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 #195,
med-biomed/gene is #101, med-drugs is #83, while the med-generic
drugs is #168. Analyzing the Zacks Industry Rank for different
medical segments, it is obvious that while the outlook for
large-cap pharma stocks is negative, that for med-drugs is
positive. Meanwhile, the outlook for med-biomed/gene and
med-generic drugs is neutral.
While several 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. Many
companies which had faced generic headwinds in the last couple of
years should see their results improve from 2013. Cost-cutting,
downsizing, streamlining of the pipeline, growth in emerging
markets and product approvals should support growth.
Among large-cap pharma stocks,
Johnson & Johnson
) currently holds a Zacks Rank #2 (Buy). The company has performed
well in the first half of 2013 and the momentum should continue
through the remainder of the year. 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. The Synthes deal should continue driving results.
), another Zacks Rank #2 stock, is doing well with first quarter
fiscal 2014 results beating expectations. The company has launched
several new products over the past few quarters and continues to
make impressive progress with its pipeline.
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 launch quarter sales
coming in at $192 million (including inventory stocking of $82
million). While Tecfidera has the potential to gain the top spot in
the oral multiple sclerosis market, Avonex and Tysabri should
continue contributing significantly to sales. Biogen is also
progressing with its hemophilia pipeline.
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, another Zacks Rank #2 stock, continues to do
well in the HIV segment and is also progressing with its HCV
), a Zacks Rank #1 (Strong Buy) 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.
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
upcoming acquisition of
(WCRX), 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 #3.
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.
) currently carries a Zacks Rank #5 (Strong Sell). While the
company's second quarter results were in-line with expectations,
Bristol-Myers cut its outlook for 2013 reflecting negative currency
movement and the recall of Fervex, a local over-the-counter (OTC)
product in France and other international markets. Moreover,
Eliquis' performance has been disappointing.
The Medicines Company
) also carries a Zacks Rank #5. Earnings estimates for this company
have been declining with third quarter results expected to remain
flat on a sequential basis.
Other companies that currently carry a Zacks Rank #4 (Sell) include
), among others.
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