(EU) Pharmaceuticals Stock Outlook – September 2011 – Industry Outlook

The pharmaceutical industry continues to be impacted by major issues such as sluggish prescription trends, European Union (EU) pricing pressure, intensifying generic competition and limited late-stage catalysts. The next five years are expected to witness a significant imbalance between new product launches and patent expirations.

All these factors will lead to a slowdown in global pharmaceutical market growth in the next five years. Major revenue generating drugs like Lipitor, Plavix, Lexapro and Zyprexa are expected to confront generic competition over the next five years.

In fact, revenues in excess of $30 billion are expected to be lost in 2011 itself due to key drugs like Lipitor and Zyprexa going off-patent. The impact of the genericization of these drugs will be felt significantly in 2012, which will be a challenging year for several companies.

At the same time, the loss of revenues due to the genericization is unlikely to be compensated sufficiently by new product launches. In view of the slowdown in top-line growth, several companies have resorted to measures like work force reduction and share repurchases to drive the bottom-line.

M&A Activity

Major merger and acquisition (M&A) deals were prevalent in the pharma sector in 2010. With most of the big pharma players already facing or likely to face generic threats to their key products, the companies are resorting to M&As and in-licensing deals to counter the loss of revenues that will arise following the genericization of its key drugs.

The spate of acquisitions in the pharma industry continued in 2011, with some major deals being announced so far in the year. They include Johnson & Johnson’s (JNJ) acquisition of Dutch biopharmaceutical company Crucell NV in February 2011. The acquisition has not only bolstered Johnson & Johnson’s portfolio, but also allowed the company to build its presence in the vaccines market, given Crucell’s expertise in manufacturing, discovering and commercializing vaccines.

Furthermore, Johnson & Johnson is looking to strengthen its medical device portfolio by acquiring Synthes. The deal is expected to close in the first half of 2012.

Pharma giant Pfizer (PFE) purchased King Pharmaceuticals to strengthen its presence in the pain management market. Moreover, Pfizer intends to purchase Icagen (ICGN) to add to its already diversified product portfolio. Merck (MRK) expanded and strengthened its ophthalmology product portfolio by purchasing specialty pharma company Inspire Pharmaceuticals in May 2011.

Another pharma major, Bristol-Myers Squibb (BMY), has been looking to expand via acquisitions and partnerships to counter the loss of revenues that will arise following the genericization of its key drugs, including the blockbuster blood thinner Plavix.

The latest in the series of deals inked by Bristol-Myers towards achieving this objective is the acquisition of privately held Amira Pharmaceuticals. Through this deal, Bristol-Myers has entered the market for fibrotic diseases. This market is characterized by a high unmet need.

Oncology also remains a much sought-after market with companies like Sanofi-Aventis (SNY) and Celgene (CELG) strengthening their presence through acquisitions.

Meanwhile, generic players are not far behind in the acquisition game. While Teva (TEVA) announced its intention to acquire Cephalon (CEPH), Watson Pharmaceuticals (WPI) acquired generic company Specifar Pharmaceuticals to expand and strengthen its presence in Europe. The Cephalon deal is in-line with Teva’s long-term strategy of expanding and strengthening its branded and specialty pharma offerings. In July 2011, Watson acquired a portfolio of generic pharmaceutical products divested following the merger between Perrigo Company (PRGO) and Paddock Laboratories.

Endo Pharmaceuticals (ENDP), a specialty healthcare solutions company, is also on an acquisition spree to counter the generic threat facing its key products. The acquisition of American Medical Systems, a leading pelvic-health devices provider, in June 2011 was the fourth major acquisition for Endo in the last one year.

Elsewhere, companies have been looking towards biotech firms to build their product portfolios. A prime example is French pharma giant Sanofi-Aventis’ acquisition of biotech company Genzyme Corp. With this acquisition, Sanofi is looking to create a new source of growth. The Genzyme acquisition will boost Sanofi’s revenues as well as its pipeline.

In April 2011, Gilead Sciences (GILD) acquired biotechnology firm Calistoga Pharmaceuticals, which focuses on developing therapies to combat cancer and inflammatory diseases. Bristol-Myers acquired biotechnology firm ZymoGenetics last year.

Going forward, we expect the M&A trend to continue. We also expect an increase in in-licensing activities and collaborations for the development of pipeline candidates.

Small biotech companies are also game for 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 developing promising pipeline candidates. Therefore, it makes sense for them to enter into deals with pharma companies with strong balance sheets.

We would recommend investors invest 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.

Emerging Markets

Another recent trend seen in the pharmaceutical sector is a focus on emerging markets. Companies like Mylan (MYL), Pfizer, Bristol-Myers, Merck, Eli Lilly (LLY), GlaxoSmithKline (GSK) and Sanofi-Aventis 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 in importance, and several companies are now shifting their focus to these areas. Emerging markets should see strong sales thanks to increased demand for medicines. Several factors like government initiatives for healthcare, new patient population, and increasing use of generics should help drive demand. Growth in emerging markets could help stabilize the base business during the industry’s 2010-15 patent cliff.

According to the IMS Institute, spending on medicines in emerging markets will double to $285-$315 billion in the next five years from $151 billion in 2010, driven by strong economic growth coupled with endeavors of concerned governments to expand access to healthcare. This will catapult “pharmerging” markets to the second position by 2015 where spending on medicines is concerned.

Branded Drugs Market Share to Decline

According to the IMS Institute, market share for branded drugs will continue declining over the next five years. Branded drugs market share, which declined from 70% in 2005 to 64% in 2010, is expected to decline to 53% by 2015. The decline will be driven by patent expiries, with generics accounting for a significant part of pharma spending. Spending on branded medicines in 2015 is expected to remain at the same level as in 2010.


We currently have a Neutral outlook on large-cap pharma stocks (Zacks #3 Rank). While the companies will continue to face challenges like pricing pressure and genericization, growth in emerging markets and product approvals could help reduce the impact.

According to the IMS Institute, 44 new branded products were launched in 2010. However, the new product approval mix was more towards orphan drugs and medicines with the same mechanism of action as existing therapies.

Important product approvals in 2011 so far include the approval of Johnson & Johnson’s prostate cancer therapy, Zytiga, Merck’s hepatitis C virus (HCV) treatment, Victrelis, Bristol-Myers Squibb’s  melanoma treatment, Yervoy, and kidney transplant therapy Nulojix, Vertex Pharma’s (VRTX) HCV treatment, Incivek and AstraZeneca’s (AZN) blood thinner Brilinta, among others.

We currently have Neutral recommendations on companies like Abbott Labs (ABT), Johnson & Johnson, Allergan (AGN) and Pfizer. We believe that Allergan’s presence across different segments and geographies will help maintain decent growth going forward.

In spite of the Neutral stance on the stock, we are positive on Bristol-Myers. Earnings estimates have been upped by majority of the analysts covering the stock after its strong second quarter results. 2011 has been a fruitful year for Bristol-Myers so far, with many key drugs getting approved. Growth in the coming quarters is expected to be driven by new product launches and acquisitions and deals.


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 US Food and Drug Administration (FDA) has been exercising more caution in granting approval to new products and several candidates are facing delays in receiving final approval.

We advise investors to avoid names such as Onyx Pharmaceuticals (ONXX) on which we have an Underperform recommendation. The company delivered lackluster results in the second quarter of 2011 due to lower revenues and higher operating expenses.

We would also advise investors to avoid companies like Eli Lilly, which is facing patent expirations on key products and whose new products may not be enough to make up for the loss of revenues that will take place once generics enter the market.

2011 will be a challenging year for Eli Lilly with the company losing patent exclusivity on Zyprexa. Zyprexa sales should erode rapidly with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization. Another company that is highly exposed to a patent cliff is Forest Labs (FRX). Roughly half the company’s top-line will be exposed to generic competition from March 2012.

BRISTOL-MYERS (BMY): Free Stock Analysis Report

CELGENE CORP (CELG): Free Stock Analysis Report

CEPHALON INC (CEPH): Free Stock Analysis Report

ENDO PHARMACEUT (ENDP): Free Stock Analysis Report

GILEAD SCIENCES (GILD): Free Stock Analysis Report

ICAGEN INC (ICGN): Free Stock Analysis Report

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

MERCK & CO INC (MRK): Free Stock Analysis Report

MYLAN INC (MYL): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

PERRIGO COMPANY (PRGO): Free Stock Analysis Report

SANOFI-AVENTIS (SNY): Free Stock Analysis Report

TEVA PHARM ADR (TEVA): Free Stock Analysis Report

WATSON PHARMA (WPI): Free Stock Analysis Report

Zacks Investment Research

About vitalstocks

This is a sample profile field. Vitalstocks is the operating company for Stockbloghub. This will place the picture of the author or company in the profile. Here is another extra line of information.


Powered by Facebook Comments

Similar Posts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange Traded Fund | Financial

RSS feeds: Abbott Laboratories | ABT | AGN | Allergan Inc. | AstraZeneca plc | AZN | BMY | Bristol-Myers Squibb Company | CELG | Celgene Corporation | CEPH | Cephalon Inc. | Eli Lilly & Company | Endo Pharmaceuticals Holdings Inc | ENDP | EU | Forest Laboratories Inc. | FRX | GILD | Gilead Sciences Inc | Glaxosmithkline plc | GSK | ICAgen Inc | ICGN | JNJ | Johnson & Johnson | LLY | Merck & Company Inc | MRK | MYL | Mylan Inc. | ONXX | Onyx Pharmaceuticals Inc | Perrigo Company | PFE | Pfizer Inc. | PRGO | Sanofi-Aventis | SNY | TEVA | Teva Pharmaceutical Industries Limited | Vertex Pharmaceuticals Incorporated | VRTX | Watson Pharmaceuticals Inc. | WisdomTree Dreyfus Euro | WPI | Exchange Traded Fund | Financial |

Other Posts by | RSS Feed for this author