Although fears regarding the drug pricing issue have waned, it will nevertheless remain a headwind until the Trump administration comes out with a policy for controlling drug prices. Drug pricing is an issue that weighed on pharma and biotech stocks for more than a year. The sector, which previously had a stellar run, started its downward trend in Sep 2015 when a single tweet by Democratic Presidential candidate Hillary Clinton sent pharma and biotech stocks tumbling. Clinton's "price gouging tweet" was in response to a huge price hike (about 5,000%) taken by Turing Pharmaceuticals for a drug that was approved by the FDA way back in 1953.
Since then, companies like Valeant ( VRX ) saw their share prices plunging as they found themselves in the midst of the drug pricing controversy.
Although pharma and biotech shares rallied post-election in November on hopes that drug pricing would not be a key focus area under a Trump presidency, the relief rally turned out to be short-lived following President Trump's views regarding drug pricing. Trump made it clear that he does not like what happened to drug prices and he will bring down drug prices.
According to the Apr 2017 Kaiser Health Tracking poll, six in ten Americans believe affordability of prescription drugs should be a top priority for the President and Congress -- focus should be on ensuring the affordability of high-cost drugs to people who need them and taking steps to lower prescription drug prices.
Some of the options favored by the public for drug price control include getting drug companies to reduce prices for medications for people on Medicare, making it easier for generics to enter the market, and requiring drug companies to provide information on how drug prices are set.
Although the pharma and biotech sectors have rebounded in 2017, 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.
Biosimilars Changing the Competitive Scenario
Another challenge being faced by the sector is the recent entry of biosimilar competition in the U.S. While a relatively new area, the market for biosimilars is huge and highly lucrative with several blockbuster biologics including Humira and Lantus slated to lose patent protection by 2020. Biosimilars are expected to reduce healthcare costs and provide a large number of patients with access to much needed biologic treatments.
According to research released by the IMS Institute for Healthcare Informatics last year, increasing acceptance of biosimilars across different therapeutic areas plus an active pipeline of 56 candidates are expected to lead to total savings of about $110 billion to health systems across Europe and the U.S. through 2020.
The report further says that by 2020, biosimilars will start competing with biologics that have annual sales of $50 billion. Several companies are working on bringing biosimilars to market for reference products like Johnson & Johnson's Remicade, Amgen's ( AMGN ) Enbrel, Roche/Biogen's Rituxan and AbbVie's Humira.
Biosimilars are also gaining acceptance across formularies. Although there is still low visibility on how well biosimilars will perform or how much of the market they will be able to capture, the focus on making expensive drugs more affordable and formulary coverage for biosimilars could very well make it challenging for innovator companies to hold on to market share for their blockbuster drugs.
Generics Pose a Threat
Quite a few of the big players in the drug industry are looking at loss of patent protection for major blockbuster drugs. With generics and biosimilars breathing down their necks, many of these companies are looking towards new products to pick up the pace and make up for lost sales. While several new products were approved last year, many like Orkambi, Repatha and Praluent failed to live up to expectations.
Moreover, with efforts on to control drug prices, chances are high that the approval process for generics could be made smoother.
Fewer FDA Approvals in 2016
There was a notable dip in FDA novel drug approvals in 2016 with the agency giving its nod to 22 treatments during the year. Compare this to 45 approvals in 2015 and 41 in 2014 and the 2016 numbers look really disappointing.
It's not like a fewer number of applications were submitted in 2016 -- as of Dec 9, 2016, 36 new molecular entity (NME) applications were submitted, in line with the average NME filings of 35 over the past decade.
However, a pretty high number of applications got complete response letters (CRLs) from the agency -- a CRL is issued by the FDA to inform the company that its application will not be approved in its present form. There could be several reasons for the same including insufficient data to support approval as well as manufacturing issues.
Some of the drugs that got CRLs in 2016 include Spectrum Pharma's Qapzola (immediate intravesical instillation post-transurethral resection of bladder tumors in patients with non-muscle invasive bladder cancer), Dynavax's experimental hepatitis B vaccine Heplisav-B, Advanced Accelerator's Lutathera (treatment of gastroenteropancreatic neuroendocrine tumors in adults), and AstraZeneca's ZS-9 (hyperkalemia). AstraZeneca is a Zacks Rank #2 (Buy) stock -- you can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Stocks to Avoid
As concerns surrounding the drug pricing issue continue to keep the sector volatile, it would be prudent to stay away from stocks that have not been able to win analysts' confidence and carry an unfavorable Zacks Rank of #4 (Sell) or #5 (Strong Sell).
Juno Therapeutics, Inc. ( JUNO ): Juno is focused on developing innovative cellular immunotherapies for the treatment of cancer. The company, however, suffered a setback with its most advanced pipeline candidate being discontinued following the emergence of safety issues. While the company is moving ahead with other candidates in its pipeline, Juno currently holds a Zacks Rank #4.
Obesity focused Orexigen Therapeutics, Inc. ( OREX ) is also a Zacks Rank #4 stock. The company has a disappointing earnings track record with first quarter loss coming in well above estimates. The average earnings surprise over the last four quarters is -104.4% while loss estimates for 2017 have gone up 21.5% over the last 60 days.
Companies like Eli Lilly and Company ( LLY ) and Adamas are also Zacks Rank #4 stocks while stocks like AMAG Pharmaceuticals, Inc. ( AMAG ) and Dr. Reddy's Laboratories Limited ( RDY ) hold a Zacks Rank #5. Lilly has underperformed the Zacks-categorized Large Cap Pharmaceuticals with shares gaining 12.9% compared to the industry gain of 14.9%.
To know more about this sector, check out our latest Pharma Industry Outlook .
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