The Drug Price Increase Debate: Separating The Winners From The Losers
“Political pressure on drug pricing has reached the point where the ability of biopharma companies to adapt to a more restrained pricing environment will differentiate winners and losers, in our view,” Goldman Sachs’ Jami Rubin said in a report.
The industry would need to adopt more rational pricing and have greater transparency in order to reduce political risk, which would lift the overhang on shares, analyst Rubin mentioned.
Over the past five years, above-CPI price increases have resulted in substantial sales. This has been led by older products. During these five years, there have been a number of patent expirations, with few new product launches. Thus, “an upcoming turn in the product cycle should improve the outlook,” Rubin commented.
The analyst highlighted three companies that seemed “best positioned to drive above-average growth irrespective of the pricing environment,” while also identifying five other companies that had historically relied on pricing for growth, but continue to have upside due to stock-specific reasons.
Rubin upgraded the rating on Eli Lilly and Co (NYSE: LLY) from Neutral to Buy, while raising the price target from $89 to $95. He mentioned that the company had limited dependency on above-CPI price and had a robust new product cycle, with the new products estimated to account for ~50 percent of 2020 sales.
These factors had positioned Eli Lilly for “a long period of above average (>10 percent through 2025) earnings growth and limit political pressure – even without Sola (Ph3 data expected in 4Q16), if it were to fail,” the Goldman Sachs report stated.
The analyst has a Buy rating on Bristol-Myers Squibb Co (NYSE: BMY), with a price target of $75. He mentioned that the company has had limited dependency on price increases in recent years, and its new products were expected to account for ~65 percent of 2020 sales, even after excluding $3 billion of Opdivo sales.
“Since August, the market has eliminated nearly $30 billion in market cap, which we estimate equates to the entire value of Opdivo’s presence in 1L and 2L lung cancer, which we do not believe is justified,” Rubin commented.
Goldman Sachs has a Buy rating on Regeneron Pharmaceuticals Inc (NASDAQ: REGN), with a price target of $521. Although new products are expected to contribute merely 28 percent of 2020 sales, most of company’s revenue is generated by Eylea, which is expected to continue recording volume growth.
“We remain impressed by the breadth and depth of REGN’s internal antibody pipeline with progress across multiple programs and expect key updates for Dupi (FDA action for atopic dermatitis), Eylea+PDGF combo (Ph2 for wet AMD) and the early I/O and orphan pipeline,” Rubin wrote.
The analyst has a Buy rating on Allergan plc Ordinary Shares (NYSE: AGN), with a price target of $300. Although the company had been “a significant price taker” over past five years, patents for most of these drugs have expired.
New products would likely contribute at least 30 percent of sales by 2020, and the contribution from price is expected to be modest. The estimates on select franchises, including Namenda, Restatsis, Bystolic and Estrace, have been lowered since price had contributed to sales growth.
Rubin maintains a Buy rating on AbbVie Inc (NYSE: ABBV), with a price target of $78. He believes that investors were underestimating the value of the company’s growing pipeline we as well as the sustainability of Humira cash flows.
“While price has contributed approximately 10 basis points of growth, volume has also grown about 15 percent per year for the past five years,” the analyst noted. He reduced the 2017 estimate for Humira U.S. sales growth from 15 percent to 12 percent, and lowered the EPS estimate for the year from $5.92 to $5.85.
Goldman Sachs has a Buy rating on Amgen, Inc. (NASDAQ: AMGN), while raising the price target from $204 to $206. The company’s revenue mix is expected to continue to change, with Repatha ramping and new products accounting for 36 percent of 2020 sales.
“In addition AMGN has a number of upcoming pipeline catalysts that we expect to drive the multiple, coupled with earnings visibility through 2H16, undemanding valuation (14x 2017E EPS) and a growing dividend (25 percent yoy),” Rubin said.
The EPS estimates for 2016 and 2017 have been raised from $11.37 to $11.39 and from $12.73 to $12.76, respectively.
Rubin maintains a Buy rating for Jazz Pharmaceuticals plc - Ordinary Shares (NASDAQ: JAZZ), while raising the price target from $195 to $187. He mentioned, “While JAZZ has benefitted from 30+ percent average price increases over the past five years on Xyrem, we see the company as another story in evolution with new products accounting for ~36 percent of revenue in 2020E.”
Although the EPS estimates for 2017, 2018 and 2019 have been reduced by 4–5 percent, they are still higher than the consensus expectations by 1–9 percent.
The analyst has a Buy rating on Horizon Pharma PLC (NASDAQ: HZNP), with a price target of $27. The company is transitioning to “more durable high growth orphan assets,” which are expected to contribute ~45 percent of 2020 sales on pipeline success. This compares with less than 10 percent two years back.
The EPS estimates for 2017, 2018, 2019 and 2020E have been reduced from $2.64 to $2.60, from $3.13 to $3.07, from $3.73 to $3.65 and from $4.26 to $4.15, respectively, to reflect a flat primary care outlook, with annual single digit declines for Duexis and Vimovo.
While saying that Concordia International Corp (NASDAQ: CXRX) had benefited significantly from above-CPI price growth, Rubin noted that Gilead Sciences, Inc. (NASDAQ: GILD) had been among the companies to benefit the least.
Goldman Sachs has Neutral ratings on both stocks, with price targets of $4 for Concordia and of $80 for Gilead.
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