President Barack Obama signed his $938 billion (623 billion) healthcare bill into law, resolving some of the uncertainty troubling the pharmaceutical sector. The House of Representatives finally approved, for the second time after it was sent back, a 10-year package including better benefits for the elderly, the poor and middleclass families. Experts expect to see re-ratings in the sector, given its relative cheap valuations. Both pharmaceutical and biotech stocks suffered last year owing to concerns over the proposed healthcare reforms.
Many investors have shunned large-cap pharmaceuticals as they were wary about the timing and extent of the reforms. In their opinion, the worst- case scenario, the government becoming a major buyer of healthcare, was avoided with the new bill. The sector is trading at about 10 times earnings, compared with the broader American stockmarket, which is trading at 15-16 times earnings.
OrbiMed Capital, a healthcare investment firm, says that valuations of American large-cap pharmaceutical companies are trading at historical lows on an absolute and relative basis. Geoffrey Hsu, the manager of OrbiMed's Biotech Growth Trust, says in a statement that "shares were being unfairly punished" last year. However he expects the sector to rebound. "With an additional 32m Americans possessing healthcare insurance, the increase in demand for healthcare products should outweigh the costs of reform that the industry faces, which equate to $85 billion over 10 years," Hsu says.
Fund managers, including Hilary Natoff, the manager of the Fidelity Funds Health Care fund, expect sectors such as generic manufacturers, pharmacy benefit managers, hospitals and laboratory chains to benefit. Life sciences and healthcare information technology industries are also likely to do well as they are going to benefit from stimulus packages that are independent from this reform, says Michael Dauchot, the managing director of RCM, a global asset manager and subsidiary of Allianz Global Investors. Managed care organisations are likely to be relieved. They had faced the possibility of competing with a government-funded public plan that would have offered lower premiums. Within the old system, many patients were left with exorbitant medical bills, and, in some cases, no insurance at all.
With interest rates at historic lows and no place to go but up, it behooves investors to have a strategy in place ahead of a rate hike cycle that is likely to begin next year. This is definitely a time to start thinking about it, because most investors will be challenged in a rising-rate environment, said John Eckel, president of Pinnacle Investment Management Inc., which has $100 million in assets under management. Typically, technology and health care stocks outperform amid rising interest rates, while financials and materials trail behind.
However, the patent-expiration cycle that is about to kick in from 2011 through 2013 is going to be difficult to manage. These companies are losing a lot of sales and high-profit products, and they are going to respond in a number of ways. One is to try to expand globally into emerging markets, and they are probably going to try to fill their revenue hole by acquiring other companies, as was the case when Pfizer [PFE] acquired Wyeth. In addition, they will try to fill out their pipeline by buying companies that have interesting pipelines, leading to more merger-and-acquisition activity. But despite the cheap valuations for big-cap pharma companies, they aren't that cheap when you look out to 2012.
Forest Laboratories, Inc. (FRX)
Four key catalysts to watch are 1) ceftaroline (antibiotic) advisory panel in Aug/Sept and FDA action in Oct., 2) linaclotide (IBS-C) Ph III data in 4Q, 3) aclidinium (COPD) Ph III data and Ph II formoterol (LABA) combo data in 4Q, and 4) Daxas FDA action by Mar 2011. Management intends to continue to pursue licensing and acquisition opportunities, with a special interest in Europe.
Pfizer (PFE)
We expect PFE will deliver EPS as expected in 2010, with Wyeth merger cost savings upside offsetting sluggish revenue. We expect pipeline enthusiasm to grow as newsflow accelerates in 2011. We project Pfizer will generate $37B in FCF (net of $19B in dividends) over the next three years(2010-2012) and use some of this cash to pursue specialty, generics, and acquisitions in emerging markets. In our view, the valuation is attractive (10.5x trough 2012E of $2.09 w/ mid-single digit EPS growth in '12-'15). PFE stock should earn a higher multiple ahead of the company returning to modest (3-5%) EPS growth post-2012.
Bristol-Myers Squibb (BMY)
Bullish about Bristol's compelling late-stage pipeline. Expect ipilimumab (melanoma) survival data in treatment-experienced patients (to be presented at ASCO 2010 in June) will be good enough to be filed and treatment-nave results are likely to be positive in 2H. BMY trades at a premium to group P/E, but we believe multiple can expand on good pipeline news. The dividend yield (5%) and possibility of strategic activity (in the long-term) limit downside stock risk.
Pharma Sales: 2009
US sales of ethical pharmaceuticals and insulins grew 5.1% last year, compared to 2008 s rise of just 1.8%, say new figures from research firm IMS Health.
Drug sales through both retail and non-retail channels reached $300.3 billion last year and demand was higher than in the previous two years, but it remains at historically low levels, says the firm.
While the 32 innovative products launched last year brought important new treatment options to patients in a number of disease areas, including cancer, thrombosis and atrial fibrillation, they drove only a limited increase in drug spending, said Murray Aitken, senior vice president, Healthcare Insight, at IMS. Access for the first time to lower-cost generic treatment options in the areas of epilepsy, migraine, and immune system disorders had a more moderate impact on market growth than generic launches in previous years. Stronger patient demand for prescription drugs throughout 2009, both for new therapy starts and refills, underscores the resilience of pharmacotherapies in today s health care equation, he added.
According to the report, key factors contributing to US market growth last year included: - stronger demand, with dispensed prescription volume in retail channels rising 2.1% to 3.9 billion dispensed prescriptions compared to growth of just 1.0% in 2008. Also, while the volume of new therapy starts in 17 major chronic disease areas declined around 1%, volume for add-on therapy starts, switches and refills rose nearly 2%; - drugmakers sustained pricing practices, competing on the basis of clinical evidence and value; - inventory management actions by retail pharmacies at the start of the year to bring stocking levels in line with market demand; - greater use of specialty pharmaceuticals, which grew 7.5% last year and now comprise 21% of US market value; and - the lower impact of patent expiries, as well as no significant product safety issues occurring during the year.
Antipsychotics remained the top-selling class of medications in the US in 2009, with prescription sales of $14.6 billion, equal to the previous year s level. Lipid regulators continued as the largest therapy class in terms of dispensed prescription volume, growing 5% to 212 million prescriptions dispensed, but their sales fell 10% to $13.1 billion, reflecting an ongoing shift toward generic alternatives, and they slipped to third place for overall sales, losing the second-place spot to proton pump inhibitors (PPIs), says IMS.
However, sales of PPIs fell 2% last year, to $13.6 billion, although their dispensed prescription volume rose 5%, while antidepressants rose from fifth to the fourth largest therapeutic class in terms of prescription sales, advancing 3% to $9.9 billion.
