Pharma & Biotech Stock Outlook - March 2014 - Industry Outlook

The pharmaceutical sector has been slowly but steadily recovering from the impact of the patent cliff being faced by several companies over the past few years. The worst of the patent cliff is over and the NYSE ARCA Pharmaceutical Index (^DRG) is up 21.4% over the last year. So far in 2014, the index is up 6.9%.

Several companies which 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.

Products that lost exclusivity recently include

Cymbalta and Evista.

Nexium could also start facing generics from May 2014 in the U.S. where sales were $2.1 billion in 2013.

The pharma sector witnessed major merger and acquisitions (M&A) activity over the last couple of years. Going forward, 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 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 with the development of promising pipeline candidates. Therefore, it makes sense for them to seek deals with pharma companies that are 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 which could see a lot of in-licensing activity include immuno-oncology, oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus (HCV) market is also attracting a lot of attention.

Some recent acquisitions/deals include

acquisition of ViroPharma,

acquisition of Santarus as well as the acquisition of Optimer Pharmaceuticals and Trius Therapeutics by

and that of Elan by

. A major acquisition agreement was announced recently -- that of

by

. This deal shows the intention of generic companies to establish a strong position in the branded market. Another significant deal was the one signed between

and

for the joint development and commercialization of up to six anti-cancer stem cell candidates from OncoMed's biologics pipeline.

Another trend that we are seeing in recent months is the divestment of non-core business segments.

sold its Capsugel unit and its Nutrition business in Aug 2011 and Nov 2012, respectively. Pfizer then spun off its animal health business into a new company,

.

Meanwhile,

divested certain non-core brands from its Consumer Healthcare segment. In Aug 2011, AstraZeneca sold its Astra Tech business to

. The monetization of non-core assets will allow the pharma/biotech companies to focus on their areas of expertise.

split into two separate publicly traded companies; while one company deals in diversified medical products, the other,

, is focusing on research-based pharmaceuticals.

is also looking to divest its ortho-clinical diagnostics business.

monetized its Incivo-related royalties; the company can use the cash generated from this deal for its cystic fibrosis program.

Restructuring activities are also gaining momentum as large pharma companies are looking to cut costs and streamline their 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

,

, Eli Lilly, Shire and

.

Of late, several companies have been looking towards Ireland for acquisitions. The latest company to join the Irish club is

which is doing a reverse merger with Dublin-based Vidara. Tax benefits are a major attraction for such deals. Other such recent acquisitions include that of Warner Chilcott by Actavis and Elan by Perrigo.

Another trend seen in the pharmaceutical sector is a focus on emerging markets. Companies like

, Pfizer, Merck, Eli Lilly, Glaxo and Sanofi are all looking to expand their presence in India, China, Brazil and other emerging markets.