2014 another growth year as big cap stocks hold up

At the start of 2014 even the most upbeat of healthcare commentators were wondering if the bull run would slow to a walk in the coming year. In answer, the sector saw one of the best ever years for financing and IPOs. And, although share price gains among the giants of the industry failed to reach the dizzy heights of 2013, the positive sentiment surrounding the industry saw most healthcare indices again significantly outperform other stock classes.

The best three performing large cap stocks alone managed to add $54bn to their market caps in the year, with the charge being led by Lilly. However, unlike the start of 2013 this time there were big pharma stocks nursing losses. Outside traditional big pharma the picture was even rosier with not one large drug maker recording share price losses, as productivity increased and both M&A activity and speculation picked up.

Stock index % change in 12 months
Nasdaq Biotechnology (US) 34%
S&P Pharmaceuticals (US)  19%
Dow Jones Pharma and Biotech (US)   23%
S&P 500 11%
Dow Jones STOXX Healthcare (EU)   18%
Thomson Reuters Europe Healthcare (EU) 3%
Euro STOXX 50 1%
FTSE-100  (3%)
TOPIX Pharmaceutical Index (Japan)  16%

Looking at the healthcare indices, while the growth rate on the Nasdaq biotech index may have slowed from the 66% gain seen at the end of 2013, the 34% increase seen in 2014 still demonstrated the continued strength of US drug stocks. Indeed, in the last five years the NBI has risen by 283% and continues to defy predictions of a correction. And with current interest in new immuno-oncology therapies, which has already spawned a number of deals this year, there appears to be little to stop the index continuing to rise in 2015.

What was interesting during 2014 was the reversal of fortune for other indices. In 2013 Indian drug makers had a tough year of it after various quality issues that caused many products to be suspended from sale in the US. However, in 2014 the Thomson Reuters India Healthcare index rose by 51% as these problems were resolved.  

In contrast the once healthy-looking European Healthcare index only reported gains of 3% compared with 37% at the end of 2013. Limited corporate activity among European stocks, and decisions by some European biotechs to shun their home markets and float in the US, could be some of the reasons behind the slowing growth.

Of the companies that EP Vantage classifies as big pharma, those with market caps above $25bn at the start of the year, our analysis shows that Lilly managed to move from the biggest share price loser of 2013 to the company with the biggest stock gains in 2014, notching up an impressive 35% rise.

What appears to have captured investors' imaginations this time around is the group’s late-stage pipeline whose successes, including approval of Trulicity (dulaglutide), have helped the group get over serious patent expiries in 2014. But with a lot of its good news behind it Lilly is looking forward to a slower 2015.

Big pharma companies: top risers and fallers in 12 months
Share price (local currency) Market capitalisation ($bn)
Top 3 risers YE 2013 YE 2014 Change YE 2014 12M Change
Eli Lilly $51.00 $68.99 35% 76.8 19.4
AbbVie $52.81 $65.44 24% 104.3 20.2
AstraZeneca $59.37 $70.38 19% 88.9 14.3
Top 3 worst performers
GlaxoSmithKline £16.12 £13.76  (15%) 107.6  (18.4)
Sanofi €77.12 €75.66  (2%) 127.3  (12.0)
Pfizer $30.63 $31.15 2% 196.3  (2.2)*
*Decrease in market cap due to share buybacks

While AbbVie’s gains in the year were driven by its hep C activities, AstraZeneca was all about its defence against the Pfizer takeover bid, which initially drove up the share price and then forced the group to focus on making its pipeline deliver. The company still, however, faces significant patent expiries and no one is forecasting a return to growth until 2018, which could make the stock look overvalued going into 2015.

At the other end of the table, GlaxoSmithKline was undone by the weakness in its respiratory business and the continuing overhang of Chinese bribery scandal. Additionally, at a point when the world is all about cancer therapies, the sale of its oncology business to Novartis might now look ill advised.

What also might now look ill judged was Sanofi’s decision to let go of its chief executive, Chris Viehbacher. The perception that the French company is not open to innovation and the lack of leadership have caused its shares to slip in a market where it is hard for pharma stocks to do wrong.

Other large cap (>$25bn) : top risers and fallers in 12 months
Share price (local currency) Market capitalisation ($bn)
Top 3 risers YE 2013 YE 2014 Change YE 2014 12M Change
Allergan $111.08 $212.59 91% 63.3 30.3
Actavis $168.00 $257.41 53% 68.2 23.8
Shire $141.29 $212.54 50% 41.8 14.2
Top 3 worst performers
Takeda ¥4,825 ¥4,997 4% 36.5  (2.4)*
Baxter International $69.55 $73.29 5% 39.7 2.0
Bayer €102.10 €113.24 11% 118.7 3.5
*Decrease in market cap due to exchange rates

Leaving the big beasts of the sector behind, what the big cap risers all have in common is M&A, such as Allergan, which after valiantly fighting off Valeant for most of the year fell exhausted into the arms of Actavis. It was a move that, alongside the group’s $28bn acquisition of Forest Laboratories, pleased Actavis shareholders, who rewarded it with a 53% up lift in its shares.

Shire also found itself the subject of an overseas interest, causing shares to rocket, but the UK-based, Irish domiciled company was not fated to join with AbbVie after the US government tightened its stance on tax inversions. Shire is now widely expected to do a substantial acquisition of its own.

Such was the strength of the large cap sector that there were no fallers, and instead it was left to Takeda, Baxter International and Bayer to claim the titles of the worst performers.

Baxter continued to struggle with the impact of bundled dialysis payments, and Takeda remained moribund owing to a lack real replacements for a number of expired big-ticket drugs, including Velcade and Biopress.

While 2014 share price gains among the bigger companies may not have matched those of 2013, the mere fact that the majority of shares continue to move upwards is still impressive. And despite talk of overvalued assets, if the recent share price activity of companies operating in the hot areas of CAR therapies are anything to go by 2015 could shape up to be another year of growth.

This article has been amended to show the correct share price for Bayer.

To contact the writer of this story email Lisa Urquhart in London at lisau@epvantage.com or follow  @LisaEPVantage on Twitter

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