Among the jitters, big pharma laggards make up lost ground


The debate between those healthcare investors who see a stock bubble and those who do not is not about to end. But there is little doubt from the performance of most indices at the end of the first quarter of 2015 that the markets are still remarkably resilient.

Look beneath the surface, however, and there are signs that investors are being increasingly selective (see tables below). Big pharma is often a good indicator of long-term sentiment, and it is noteworthy that the three best-performing large cap stocks are none other than those that finished 2014 bottom of the list.

The obvious conclusion is that even some of the larger names are stretching the boundaries of valuation fundamentals, and the market has turned to the laggards of 2014 in the hope that their dismal performance will have provided a buying opportunity. Step forward Sanofi, GlaxoSmithKline and Pfizer.

Such hints of doom and gloom might point to the conclusion that this is as big as the healthcare bubble is going to get. Still, March’s correction is nothing compared with that of a year ago, and at the end of the first quarter healthcare indices still managed to outperform most broad market measures except the blue-chip Euro Stoxx 50.

Stock index % change in Q1
Nasdaq Biotechnology (US) 13%
S&P Pharmaceuticals (US)  4%
Dow Jones Pharma and Biotech (US)   6%
S&P 500 0%
Dow Jones STOXX Healthcare (EU)   20%
Thomson Reuters Europe Healthcare (EU) 5%
Euro STOXX 50 18%
FTSE-100 3%
TOPIX Pharmaceutical Index (Japan)  23%

It should also be of interest to those looking further afield that European healthcare stocks have continued rising, albeit modestly. Witness the steady gains made by Sanofi and Glaxo so far this year.

Both had been hit in 2014, Sanofi after releasing its chief executive, Chris Viehbacher, and Glaxo for a multitude of reasons including the failure to manage the lifecycle of its respiratory franchise and decision not to pursue aggressive deal-making. Pfizer, too, had had a lacklustre 2014 after its failed attempt to buy AstraZeneca.

Now all seems to be changing, Sanofi awaiting one of the most important verdicts of 2015 – a regulatory decision on its anti-PCSK9 project Praluent – and Pfizer seen as a company that will surely pursue M&A in its chase for share price accretion, whatever the cost of the targets might be.

Big pharma companies: top risers and fallers in Q1 2015
Share price (local currency) Market capitalisation ($bn) 
Top 3 risers YE 2014 Q1 2015 % change Q1 2015 3mth change
Sanofi  €75.66 €91.93 22% 140.8 13.5
GlaxoSmithKline  £13.76 £15.46 12% 113.8 6.3
Pfizer  $31.15 $34.79 12% 213.6 17.3
Top 3 worst performers
AbbVie  $65.44 $58.54 (11%) 93.2 (11.1)
Johnson & Johnson  $104.57 $100.6 (4%) 279.7 (13.0)
AstraZeneca  $70.38 $68.43 (3%) 86.4 (2.4)

Glaxo’s climb, meanwhile, is likely due to turning sentiment – a mood in sharp contrast to that with which its UK rival AstraZeneca is regarded, as it is coming off the highs it hit last year when its stock climbed 19% (2014 another growth year as big cap stocks hold up, January 7, 2015). AbbVie, Q1’s biggest faller, has seen waning confidence in its ability to overcome genericisation of Humira, and raised eyebrows over the $21bn it paid for Pharmacyclics.

Looking at large cap stocks outside the big pharma category, Alexion was off on underwhelming full-year expectations and the retirement of its chief executive, Leonard Bell; it is possible that, with spiralling drug costs near the top of US political agendas, the group’s Soliris – the world’s most expensive drug – stands in the line of fire.

Lingering doubts are also hitting Vertex and Baxter, the former on its ability to continue expanding the cystic fibrosis market with combinations of Kalydeco and novel agents, and the latter over the plan to spin out Baxalta, its biopharma business, in the middle of this year.

It is the other large risers, however, that are more interesting, Valeant and Merck KGaA both showing the power of doing deals in the current market.

Other large cap (>$25bn): top risers and fallers in Q1 2015
Share price (local currency) Market capitalisation ($bn) 
Top 3 risers YE 2014 Q1 2015 % change Q1 2015 3mth change
Novo Nordisk  DKr260.30 DKr372.00 43% 122.6 29.0
Valeant  $143.11 $198.62 39% 68.3 20.3
Merck KGaA  €78.62 €104.75 33% 34.2 6.2
Top 3 worst performers
Baxter International  $73.29 $68.50 (7%) 37.2 (2.5)
Alexion Pharmaceuticals  $185.03 $173.30 (6%) 35.0 (1.7)
Vertex Pharmaceuticals  $118.80 $117.97 (1%) 28.6 (0.1)

Investors continued to reward Valeant’s debt-fuelled acquisition binge, which most recently saw the group snare Salix. Even more amazing is the transformation of the failure-prone Merck KGaA into an immuno-oncology wannabe that managed to sell its anti-PD-L1 MAb avelumab for $850m up front to Pfizer, and then license in Intrexon/Ziopharm’s CAR-T technology.

And the best-performing large stock of all was Novo Nordisk, surging 43% so far this year after a disappointing 2014 thanks to what Bernstein called a “trifecta of positive news”: oral semaglutide yielded positive phase II data, interim data from the Devote study led to a US filing for Tresiba and Ryzodeg, and there was a positive currency effect to boot.

Just outside the top three, Biogen closed Q1 up 24%, equivalent to a barely credible $19bn on the strength of phase I data for its Alzheimer’s project BIIB037 (Biogen clears one Alzheimer’s hurdle; now comes the tricky bit, March 20, 2015). It is ironic that this positive event triggered the recent market wobble, as investors asked whether this was as good as things would get.

In comparison, April 2014 saw all of the year's gains until that point wiped out on fears of the sustainability of pharma’s pricing power – a much sharper correction from which the market nevertheless surged back. Focus now falls on Asco to show whether biopharma can do the trick a second time around.

To contact the writers of this story email Jacob Plieth or Amy Brown in London at or follow @JacobEPVantage or @AmyEPVantage on Twitter

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