Pharma Industry Outlook: M&A, Licensing Abound

Arpita Dutt

19 November 2014 at 2:50 pm

The pharmaceutical sector, which had been witnessing several tax inversion deals over the last few months, is unlikely to go down this route given the Sep 2014 notice issued by the U.S. Department of the Treasury. New rules imposed by the Treasury Department make such cross-border deals unattractive -- in fact, AbbVie (ABBV) dropped its plans to acquire UK-based Shire (SHPG) and Salix (SLXP) also backed off from its decision to merge with Cosmo. Other casualties include the merger agreement between Auxilium (AUXL) and QLT, Inc. (QLTI).

However, mergers and acquisitions (M&As) will continue to play a major role in the pharma sector and are not showing any signs of slowing down. Auxilium, which terminated its merger agreement with QLT, will be acquired by Endo (ENDP) in the first half of 2015.

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 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 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 immuno-oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus (:HCV) market is also attracting a lot of attention.

Immuno-oncology has been a key focus area this year 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 Squibb (BMY), AstraZeneca (AZN), Merck (MRK) and Roche (RHHBY) -- these companies came out with promising data on their immuno-oncology candidates at ASCO. Deals targeting immuno-oncology are being inked by companies like Pfizer (PFE), Merck KGaA (MKGAF), Bristol-Myers, AstraZeneca and Incyte (INCY).

Another trend witnessed recently is the divestment of non-core business segments. Companies like Pfizer, Abbott (ABT), UCB (UCBJF), Novartis (NVS), GlaxoSmithKline (GSK) and AstraZeneca have all been a part of this trend. The monetization of non-core assets allows pharma/biotech 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 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 include Allergan, Merck, Novartis, Eli Lilly (LLY), Shire and Sanofi (SNY).

New Products Hold Promise

The worst of the patent cliff is over for the pharma sector, which is slowly but steadily recovering from the impact of genericization. Many companies that 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.

So far in 2014, about 34 new molecular entities and Biologics License Applications were approved. Some important product approvals so far this year include:

Emerging Markets and Biosimilars

Another trend seen in the pharma sector is a focus on emerging markets. Companies like Mylan (MYL), Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to expand their presence in India, China, Brazil and other emerging markets.

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 near-term growth.

We are also seeing several companies like Merck, Amgen (AMGN), Biogen (BIIB) and Actavis (ACT) targeting the highly lucrative market for biosimilars (generic versions of biologics).

Earnings Trends

The Q3 earnings season is winding down with 94.2% of medical companies releasing their results. So far, the earnings "beat ratio" (percentage of companies coming out with positive surprises) is 75.5%, while the revenue "beat ratio" is 79.6%. Total earnings grew 15.4% compared to 15.8% in the second quarter, while total revenue improved 12.2% in the quarter compared to 12.4% in the second quarter. Earnings growth was driven not just by cost-cutting measures but also by healthy top-line gains.

Looking at consensus earnings expectations for the fourth quarter, earnings are expected to grow 16.3% and revenues 8.9%. New product sales should pick up significantly going forward.

Overall, 2014 earnings are expected to grow 14.7% and revenues 9.3%. 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 #112, med-biomed/gene is #62, med-drugs is #74, while med-generic drugs is #21. Analyzing the Zacks Industry Rank for different medical segments, it is obvious that the outlook is Positive for med-generic drugs, med-biomed/gene and med-drugs, and Neutral for large-cap pharma stocks.

OPPORTUNITIES

While EU austerity measures and genericization remain headwinds for some companies, 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, emerging markets and new products should support growth.

Among pharma stocks, companies like Allergan (AGN), Bristol-Myers and Shire look attractive with all three carrying a Zacks Rank #2 (Buy). Allergan has long been viewed an attractive acquisition target. Valeant Pharmaceuticals (VRX) is also well-positioned with a Zacks Rank #1 (Strong Buy).

In the biotech space, we are positive on AbbVie, Biogen, Gilead, Celgene, and Achillion (ACHN) among others. All these are Zacks Rank #2 stocks. AbbVie has an important regulatory event coming up with the FDA expected to decide on its HCV combination treatment shortly. Meanwhile, Achillion’s HCV pipeline holds immense potential.

Among generic companies, Akorn (AKRX), Mylan, Actavis and Teva (TEVA) look well-positioned. While Akorn and Mylan are Zacks Rank #1 stocks, Actavis and Teva carry a Zacks Rank #2.

WEAKNESSES

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.

Large-cap pharma companies that currently carry a Zacks Rank #5 (Strong Sell) include Sanofi, whose diabetes segment is under pressure. Among biotech stocks, companies like Regeneron and Intercept (ICPT) are Zacks Rank #4 (Sell) stocks.

People
“Call Her Daddy'”s Alex Cooper Models Her Wedding Night Lingerie in Instagram Reveal: See the Racy Look
Cooper wore a sexy lacy bodysuit from SKIMS' Wedding Shop collection after marrying Matt Kaplan in Mexico
17h ago
Malay Mail
EPF announces account restructuring that lets contributors withdraw anytime
KUALA LUMPUR, April 25 — The Employees' Provident Fund (EPF) announced today a restructuring of its contributors account...
11h ago
The Telegraph
Horse trainer accused of rape and murder found dead at home
A horse trainer who was accused of the murder and rape of a showjumper he was in an “illicit relationship” with has been found dead before the second day of his trial was set to begin.
19h ago
Malay Mail
Kuala Kubu Baru by-election: Pakatan candidate Pang Sock Tao vows to continue Lee Kee Hiong’s legacy
KUALA KUBU BARU, April 24 — The newly announced Pakatan Harapan (PH) candidate for the Kuala Kubu Baru by-election, Pang...
1d ago
Malay Mail
Navy chopper crash: Police probe launched into hate comment on X
KUALA LUMPUR, April 25 — The police have opened an investigation into a hate comment in relation to the recent helicopte...
7h ago
People
Kourtney Kardashian's Sexy Bikini Photo from Her 45th Birthday Leaves Husband Travis Barker Melting
Kardashian enjoyed a vacation in paradise with her husband and four kids in honor of "45 trips around the sun"
2d ago
People
Joan Collins, 90, Wears Sheer, Embellished Top and Oversize Bow for London Date Night with Her Husband Percy Gibson
The couple, who wed in 2002, supported their friend Gabriela Peacock’s book launch at the Broadwick Soho
21h ago
Malay Mail
Rahim Thamby Chik says former Umno's Dewan Negara deputy president Mohamad Ali now in Bersatu
KUALA LUMPUR, April 25 — Parti Pribumi Bersatu Malaysia information committee member Tan Sri Abdul Rahim Thamby today cl...
13h ago
People
TikToker Xandra Pohl Sizzles in Racy Bikinis in “Sports Illustrated Swimsuit” Rookie Shoot: ‘Been My Dream’
Pohl joins Brittany Mahomes and seven Swim Search finalists in the 2024 Rookie class in the magazine’s 60th-anniversary issue, out May
21h ago
Yahoo News Singapore
Fatal accident in Tampines: 42-year-old driver involved in crash charged with four offences, including dangerous driving causing death
After a fatal collision in Tampines, Muhammad Syafie Ismail, 42, faces four charges including dangerous driving causing death.
12h ago
The Hill
Romney: ‘You don’t pay someone $130,000 not to have sex with you’
Sen. Mitt Romney (R-Utah) says no one is buying the story that former President Trump didn’t have a sexual relationship with porn actress Stormy Daniels, quipping to CNN, “You don’t pay someone $130,000 not to have sex with you.” Trump’s former personal attorney, Michael Cohen, paid Daniels a week and a half before the 2016…
1d ago
The Telegraph
The five horrible defensive mistakes that derailed Liverpool’s title bid
When you are fighting to stay in the title race and need a win at the home of your city rivals, you cannot get away with the calamitous defending that gifted Everton the lead against Liverpool.
19h ago
People
Sydney Sweeney Poses Upside Down During Vacation: 'Hanging in Hawaii'
The 'Anyone But You' actress has been sharing her daily dose of travel content
1d ago
The Telegraph
Watch: Biden reads ‘pause’ aloud from teleprompter in latest speech blunder
Joe Biden has suffered an “Anchorman moment” after he read out a prompt to “pause” on his teleprompter to a baffled audience.
16h ago
People
Selena Gomez Has a Matrix Moment in a Figure-Hugging Leather Look for the Time100 Summit
The star brought serious cool-girl energy in the all-black ensemble
21h ago
AFP News
North Koreans in China vanish as border reopens
After fleeing famine in North Korea, Kim Cheol Ok laid low in China for decades -- until a doomed run for freedom got her sent back to her repressive homeland, her family says.She told her family she was being sent back to North Korea two hours later and was never heard from again.
13h ago
Malay Mail
If we give up our late-night mamak, what’s left of our dignity?
APRIL 25 — He calls me late at night. He’s incensed. Apparently, the folks on radio did it no justice. At first fla...
16h ago
The Independent
Remains of woman and daughter not seen for 24 years found in house of suspected killer on day he dies
Larry Webb confessed on his deathbed to shooting and killing Susan Carter and her daughter Natasha ‘Alex’ Carter over financial troubles
2d ago
Malay Mail
TTM Technologies opens RM958m plant in Penang, first in region
SEBERANG PERAI, April 25 — Printed circuit boards (PCBs), radio frequency (RF) components and RF microwave/microelectron...
11h ago
Malay Mail
Report: MACC grants extension to Dr Mahathir's sons to declare assets
KUALA LUMPUR, April 25 — The two sons of former prime minister Tun Dr Mahathir Mohamad are still seeking an extension fr...
15h ago

Latest stories