The pharma/biotech sector has been in the middle of a controversy, with questions being raised about the high prices of drugs. Democratic presidential frontrunner Hillary Clinton's "price gouging" tweet triggered a slide in healthcare stocks in September.
While there has always been concerns regarding the pricing and affordability of prescription drugs, the issue is back in focus following a 5000% price hike implemented by Turing Pharmaceuticals for Daraprim (pyrimethamine) that was approved by the FDA way back in 1953.
Turing had acquired rights to Daraprim this year from Impax Laboratories and reportedly hiked its price from $13.50 to $750 per tablet.
Other companies like Valeant ( VRX ) are also under review for significantly hiking the prices of acquired drugs. Irrespective of who wins the presidential race, drug pricing will remain a topic of discussion among policymakers, the media and the general public.
According to the Aug 2015 Kaiser Health Tracking poll, most Americans (72%) find drug costs unreasonable and 74% are of the view that drug companies put profits before people. So drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.
Meanwhile, mergers, acquisitions and deals continue to take center stage in the pharma sector. While 2014 turned out to be one of the most active years in the pharma sector where mergers and acquisitions (M&As) and licensing agreements are concerned, the trend continues this year as well.
Tax inversion deals, which had lost their luster considering new rules imposed by the Treasury Department, are back in focus with Pfizer ( PFE ) making a deal with Ireland-based Allergan ( AGN ) to combine their businesses, creating the world's largest drug company.
AbbVie's ( ABBV ) $21 billion acquisition of Pharmacyclics goes to show that lofty valuations will not deter large companies from pursuing acquisitions to boost their pipelines and product portfolios. Meanwhile, 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 such deals -- most of them find it challenging to raise cash, thereby making it difficult to survive and continue with the development of promising pipeline candidates. Therefore, it makes sense to seek deals with pharma companies 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 attracting a lot of interest include central nervous system disorders and immunology/inflammation.
The hepatitis C virus (HCV) market is also attracting a lot of attention. Another lucrative area is immuno-oncology as these therapies have the potential to change the treatment paradigm for cancer -- they basically use the natural capability of the patient's own immune system to fight the cancer. Major players in this field include Bristol-Myers, AstraZeneca, Merck and Roche.
Deals targeting immuno-oncology are being inked by companies like Pfizer, Merck KGaA, Bristol-Myers, AstraZeneca and Incyte. Companies like Juno and Kite are also advancing in this area. While Celgene's immunotherapy deal with Juno, which is worth at least a billion dollars raised a few eyebrows given the high price tag, the deal just goes to show the growing interest in the field of immunotherapy.
Another trend being witnessed is the divestment of non-core business segments. Companies like Pfizer, UCB, Novartis, Glaxo and AstraZeneca have all been a part of this trend. The monetization of non-core assets allows these companies to focus on their areas of expertise.
Restructuring activities are also gaining momentum as large pharma companies look to cut costs and streamline operations. Most of these companies like Merck, Novartis, Eli Lilly, Shire and Sanofi are re-evaluating their pipelines and discontinuing programs with an unfavorable risk-benefit profile.
New Products Should Deliver
Highly-awaited new products that gained approval last year should contribute significantly to revenues. Gilead's (GILD) HCV combination treatment, Harvoni, has already brought in sales of $10.5 billion in the first nine months of 2015.
The FDA also said yes to Celgene's ( CELG ) blockbuster hopeful Otezla and Amgen's leukemia drug, Blincyto. Products like Medivation's Xtandi and AbbVie's Imbruvica gained label expansions.
Other highly anticipated treatments like Opdivo (metastatic melanoma), Viekira (HCV), Esbriet (idiopathic pulmonary fibrosis), Keytruda (melanoma), Orbactiv and Dalvance (skin infections), and Zydelig (blood cancer) were among the 41 new molecular entities (NMEs) and Biologics License Applications (BLAs) approved last year.
Meanwhile, so far in 2015, the FDA has approved 35 NMEs and BLAs. Some of the important new product approvals this year include Vertex's cystic fibrosis treatment, Orkambi, Amgen's heart failure treatment, Corlanor, Pfizer's cancer treatment, Ibrance, Novartis' psoriasis treatment, Cosentyx, PCSK9 inhibitors - Amgen's Repatha and Sanofi/Regeneron's Praluent, Roche's advanced melanoma treatment, Cotellic and Gilead's Genvoya (HIV).
Key regulatory events coming up include the FDA's decision regarding the approval of BioMarin's Duchenne muscular dystrophy treatment, Kyndrisa, Actelion's Uptravi (pulmonary arterial hypertension) and a few product label expansions.
Biosimilars in Focus
With the FDA approving the first biosimilar in the U.S. (Zarxio, a biosimilar version of Amgen's blockbuster drug, Neupogen), the floodgates have opened. While biosimilars have been available in the EU for quite a while, there was no regulatory pathway for biosimilars in the U.S.
Biosimilars should cut healthcare costs and provide a large number of patients with access to much needed biologic treatments. According to information provided by Express Scripts, about $250 billion could be saved in the next decade (2014 - 2024) if biosimilars for 11 products including Neupogen, Avastin, Epogen, Humira, Neulasta, Remicade and Rituxan are approved. According to the company, Neupogen biosimilars alone represent potential savings of about $5.7 billion.
Apart from Novartis, companies like Merck, Amgen, Pfizer, Biogen ( BIIB ) and Allergan are targeting the highly lucrative biosimilars market.
The Medical sector is having a good earnings season: 94.1% of the sector has reported results, with earnings growing 14.8% on revenue growth of 9.5% from the year-ago period. While the earnings beat ratio is 81.3%, the revenue beat ratio is 62.5%. Although currency continues to impact results, new products are contributing significantly and increased pipeline visibility and appropriate utilization of cash should increase confidence in the sector.
For a detailed look at the earnings outlook for the Medical and other sectors, please check our Zacks Earnings Trends report.
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 #94, med-biomed/gene is #87, med-drugs is #39, while med-generic drugs is #71. Analyzing the Zacks Industry Rank for different medical segments, it is obvious that the outlook is Positive for med-biomed/gene, med-drugs and med-generic drugs and Neutral for large-cap pharma.
While EU austerity measures, negative currency impact and pricing pressure remain headwinds, the pharma industry has emerged 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, emerging markets and new products should support growth.
In the biotech space, we are positive on Gilead, Baxalta ( BXLT ), Corcept ( CORT ) and Biogen among others. While Baxalta and Corcept are Zacks Rank #1 (Strong Buy) stocks, the others carry 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.
Pharma companies that currently carry a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) include Novartis ( NOV ) and Sanofi ( SNY ). Among biotech stocks, companies like Medivation ( MDVN ) are Zacks Rank #5 stocks, and others like PDL BioPharma ( PDLI ) and Puma ( PBYI ) are Zacks Rank #4 stocks.
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