The pharmaceutical sector has been slowly but steadily
recovering from the impact of the patent cliff being faced by
several companies over the past few years. The worst of the patent
cliff is over and the NYSE ARCA Pharmaceutical Index (^DRG) is up
21.4% over the last year. So far in 2014, the index is up 6.9%.
Several companies which had been struggling to post growth in the
face of genericization over the past few years are now on the
recovery path. New products should start contributing significantly
to results, and increased pipeline visibility and appropriate
utilization of cash should increase confidence in the sector.
Products that lost exclusivity recently include
) Cymbalta and Evista.
) Nexium could also start facing generics from May 2014 in the U.S.
where sales were $2.1 billion in 2013.
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 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 immuno-oncology, oncology, central
nervous system disorders, diabetes and immunology/inflammation. The
hepatitis C virus (HCV) market is also attracting a lot of
Some recent acquisitions/deals include
) acquisition of ViroPharma,
) acquisition of Santarus as well as the acquisition of Optimer
Pharmaceuticals and Trius Therapeutics by
) and that of Elan by
). A major acquisition agreement was announced recently -- that of
). This deal shows the intention of generic companies to establish
a strong position in the branded market. Another significant deal
was the one signed between
) for the joint development and commercialization of up to six
anti-cancer stem cell candidates from OncoMed's biologics pipeline.
Another trend that we are seeing in recent months is the divestment
of non-core business segments.
) 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
) is also looking to divest its ortho-clinical diagnostics
) monetized its Incivo-related royalties; the company 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
Of late, several companies have been looking towards Ireland for
acquisitions. The latest company to join the Irish club is
) which is doing a reverse merger with Dublin-based Vidara. Tax
benefits are a major attraction for such deals. Other such recent
acquisitions include that of Warner Chilcott by Actavis and Elan by
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
Until recently, most of the commercialization efforts were
focused on the U.S. -- 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 to 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,
) and Actavis are all targeting the highly lucrative biosimilars
All companies falling under the Medical sector have reported fourth
quarter and full year 2013 results. While earnings-beat and
revenue-beat ratios (percentage of companies coming out with
positive surprises) were pretty impressive, growth ratios were
modest. Fourth quarter results were characterized by currency
headwinds as well as the impact of generics.
Fourth quarter 2013 earnings "beat ratio" was 74.0% while the
revenue "beat ratio" was 76.0%. Total earnings for this sector were
up 1.1%, compared to 0.2% recorded in the third quarter of 2013.
Total revenues moved up 5.3% in the quarter versus 5.8% growth in
the third quarter of 2013.
Looking at the consensus earnings expectations for the first
quarter, earnings are expected to decline 3.3%. Tough challenges
for some companies, negative currency movement and a few patent
expirees will affect first quarter growth. However, growth should
pick up from the second quarter for which 1.6% earnings growth is
Overall, 2014 earnings are expected to grow 6.5%. For a detailed
look at the earnings outlook for the Medical and other sectors,
please check our
Zacks Earnings Trends
Focus on New Products
2013 saw the FDA approving 27 novel medicines, about one-third
(33%) of which were identified by the FDA as "First-in-Class,"
meaning they use a new and unique mechanism of action for treating
a medical condition. These include drugs like Invokana (type II
diabetes), Kadcyla (HER2-positive late-stage breast cancer),
Sovaldi (an interferon-free oral treatment for some patients with
chronic hepatitis C) and Mekinist (metastatic melanoma).
Yet another one-third of the approved drugs fall under the rare or
"orphan" disease category that affects 200,000 or fewer Americans.
These include Imbruvica (mantle cell lymphoma), Gazyva (chronic
lymphocytic leukemia), Kynamro (homozygous familial
hypercholesterolemia) and Adempas and Opsumit (both for pulmonary
arterial hypertension). Three of the approved drugs - Gazyva,
Imbruvica and Sovaldi - had breakthrough therapy designation.
Breakthrough status, a new designation that became effective after
Jul 9, 2012, is designed to cut short the development time of
promising new treatments.
Some important products approved in 2013 include:
Drugs like Tecfidera, Sovaldi and Imbruvica represent strong
So far in 2014, drugs that have gained approval include
AstraZeneca's Myalept (complications of leptin deficiency) and
Farxiga (type II diabetes),
) Northera (to treat neurogenic orthostatic hypotension),
) Vimizim (Morquio A syndrome) and
) Hetlioz (non-24- hour sleep-wake disorder).
Upcoming events include FDA advisory panel review of the regulatory
) experimental diabetes treatment, Afrezza. April should be an
active month with the agency expected to deliver a response on the
approvability of several experimental drugs including Afrezza,
Glaxo's Eperzan (type II diabetes) and Arzerra (CLL).
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 #225,
med-biomed/gene is #69, med-drugs is #84, while the med-generic
drugs is #8. 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 Negative for
large-cap pharma stocks.
While several companies will continue to face challenges like EU
austerity measures and genericization, the pharma industry is out
of the worst of its genericization phase. Many companies which had
faced generic headwinds in the last couple of years should continue
to see a sustained improvement in results this year. Cost-cutting,
downsizing, streamlining of the pipeline, growth in emerging
markets and new product launches should support growth.
Among pharma stocks, Shire, a Zacks Rank #1 (Strong Buy) stock,
looks well-positioned for growth with the company expanding its
product portfolio and pipeline through the acquisition of
ViroPharma. Horizon Pharma, a Zacks Rank #2 (Buy) stock, also seems
on the right path with the company announcing its plans to acquire
In the biotech space, we are positive on Biogen. Tecfidera, the
company's recently launched oral multiple sclerosis drug, is off to
a strong start with the product delivering sales of $876 million
(as of Dec 31, 2013) since its launch in early April 2013. 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 gained EU approval recently.
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
Gilead, a Zacks Rank #1 stock, continues to do well in the HIV
segment and has a potential blockbuster in its portfolio in the
form of HCV treatment, Sovaldi.
Among generic companies, Actavis looks well-positioned. Actavis is
slowly and steadily building its position in the branded market
through acquisitions (Actavis Group, Warner Chilcott and the
upcoming acquisition of Forest). 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 #2.
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.
Among large-cap pharma companies, Eli Lilly is gearing up for
another round of patent expiries -- Cymbalta in Dec 2013 and Evista
this year. We prefer waiting on the sidelines until the company is
able to emerge from the impact of genericization.
Companies that currently carry a Zacks Rank #4 (Sell) include
), Sanofi and Glaxo among others. Sanofi, which is facing currency
headwinds, was in the news recently related to the development of
its PCSK9 inhibitor, alirocumab. The FDA has asked Sanofi and
) to evaluate potential neurocognitive adverse events across the
global development program for alirocumab, especially in long-term
studies. While results on PCSK9 inhibitors in development have been
encouraging so far, this is the first time that serious safety
concerns have been raised.
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