Big pharma enjoys stock market recovery in first half of year

Analysis

A look at the share price performance of the world’s biggest drug makers so far this year show that big pharma’s return to favour is continuing apace. The picture is helping to reverse 2010’s dismal performance, when only three companies managed to notch up notable gains over the year: Novo Nordisk, Novartis and Bristol-Myers Squibb (Novo and Alexion an investor's dream among big caps in 2010, January 6, 2011).

Conversely, since the beginning of 2011 only three big pharma stocks are showing declines: Teva, Takeda and Merck & Co. The mid-cap stocks provide a more balanced picture, although the risers, paced by Elan and Valeant, still outnumber the fallers. Notable disappointments of the first half include Salix Pharmaceuticals and United Therapeutics, hurt by set backs to crucial products (see analyses below).

Safe havens

Numerous factors combined to suppress global equity markets over the first half of the year, including concerns about sluggish global economic growth and a slow recovery in the US, and worries about the future of the Euro zone and Greece’s near default on its debt. Within this context, investors have sought safer places to put their money, and shares in big pharma, considered relatively more recession proof than other companies, have benefited.

At the same time, many analysts believe that investors are starting to look beyond the patent cliff; fears about an impending collapse in big pharma’s profits had a lot to do with 2010’s dismal stock market performance from this cohort. A couple of success stories from big pharma’s pipeline – for example Novartis’ oral MS therapy Gilenya and excitement around Pfizer’s novel arthritis pill tofacitinib – have undoubtedly helped boost confidence that these companies might just be able to bring fresh innovation to replace lost revenues.

At the same time, last year’s share price declines also improved the dividend yield of these stocks, boosting returns to shareholders. For example AstraZeneca and GlaxoSmithKline are among the highest yielding stocks in the FTSE 100; at 5% and 4.9% respectively on yesterday’s share price.

Big pharma’s troubles are not over and patent cliffs are largely yet to be reached. But the factors above have certainly helped improved the image of these stocks in the eyes of many investors over the last six months.

Stock Market Index  % change in H1 2011
Dow Jones Healthcare (US)   13%
S&P Pharmaceuticals (US)  9%
AMEX Pharmaceutical (US)  9%
Dow Jones STOXX Healthcare (EU)   4%
Thomson Reuters Europe Healthcare (EU) 11%
TOPIX Pharmaceutical Index (Japan)  -3%
Thomson Reuters India Healthcare (India) -5%

The table above shows the performance of various regional pharma indices since January. In the US and Europe, drug indices have outperformed broader measures – the FTSE 100 is up 1% and the Stoxx 50 is down 1% over the same period, while in the US the Dow Jones has climbed 7% since January.

Elsewhere, Japan has been impacted by the tsunami disaster and the India index is falling back after surging 34% last year.

Big cap analysis

The industry's best performer this year, Baxter, is largely a recovery story. Last year’s concerns about oversupply in the blood plasma market have abated and a number of other issues have passed; shares in the company are currently at 15-month highs.

Sanofi and Gilead are also recovering from a disappointing 2010 on the stock market. The former is being helped by growing appreciation of last year’s swoop on Genzyme while the latter is benefiting from encouraging data from its HIV pipeline and efforts to move into new areas.

At Pfizer, investors also appear to be reacting well to the strategy path being set out by new chief executive, Ian Read, which includes big cuts to R&D spending. However a couple of pipeline successes have also helped; as well as tofacitinib hopes are growing for blood thinner Eliquis, partnered with Bristol-Myers Squibb, and a novel, home grown lung cancer therapy, crizotinib (EULAR - Expectations keep building for Pfizer's RA pill, May 27, 2011).

AstraZeneca meanwhile has managed to notch up impressive gains, despite fears its biggest growth driver, heart drug Brilinta, might struggle to win US approval (Event - Astra awaiting crucial US verdict on Brilinta, June 21, 2011).

Large cap ($30bn+) pharma companies: top risers and fallers in H1 2011
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 Risers 31-Dec-10 30-Jun-11 % change YE 2010 H1 2011
1 Baxter International ($) 50.62 59.69 18% 29.3 34.0
2 Pfizer ($) 17.51 20.60 18% 140.3 162.8
3 Sanofi (€) 47.85 55.44 16% 83.0 108.2
4 AstraZeneca ($) 43.68 50.07 15% 61.6 68.4
5 Gilead Sciences ($) 36.24 41.41 14% 29.1 32.6
Top Fallers
1 Teva Pharmaceutical Industries ($) 52.13 48.22 (8%) 46.8 45.3
2 Takeda (¥) 3,995 3,715 (7%) 38.6 35.2
3 Merck & Co ($) 36.04 35.29 (2%) 128.9 108.9

Top of the fallers is Teva, hurt by disappointing data on one of its biggest pipeline hopes, MS drug laquinimod, which was largely blown out the water by a rival new compound from Biogen Idec (Biogen steals Teva's thunder with BG-12 data, April 26, 2011).

Investors were not all convinced by the Israeli company’s acquisition of Cephalon either – a similar theme for Takeda, which did not delight many shareholders with its $13.7bn purchase of Nycomed (Takeda confirms defensive course in Nycomed buy, May 19, 2011). Growing safety fears around the Japanese company’s diabetes pill Actos have also hurt sentiment.

Merck, meanwhile, cannot seem to get investors to back its strategy - whereas companies like Pfizer have not been afraid to cut R&D spending, Merck has declined to take such draconian measures to preserve earnings growth in the short term.

Mid-cap analysis

Amongst the mid-cap gainers, Elan has made steady progress over the year; the sale of its drug technology unit to Alkermes in May provided an additional boost.

Valeant continues to go from strength to strength, with investors continuing to see significant value in the company’s acquisition spree of the last couple of years, despite being thwarted by Teva in May in an attempted swoop on Cephalon.

Regeneron has also kept up momentum over the year, on growing hopes for macular degeneration therapy VEGF Trap-Eye. The product, now branded Eylea, won the backing of a FDA panel last month and approval is now widely anticipated in August.

Biogen Idec has MS therapy BG-12 to thank the most for its performance; surprisingly positive data released in April has pushed the stock to record highs.

And finally Vertex is enjoying a strong year in the wake of positive phase III results for cystic fibrosis drug, VX-770 (Kalydeco), released in February. More recently the approval and launch of hepatitis C drug Incivek, widely projected to be a blockbuster next year selling $1.75bn in the US alone, has also helped the stock.

Mid cap ($2.5bn-$30bn) pharma companies: top risers and fallers in H1 2011
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 Risers 31-Dec-10 30-Jun-11 % change YE 2010 H1 2011 EP Vantage comment and analysis
1 Elan ($) 5.73 11.37 98% 3.4 6.7 Alkermes snaps up Elan drug technology unit
2 Valeant Pharmaceuticals International ($) 28.29 51.96 84% 8.6 15.5 Valeant seeks to repeat the growth trick with surprise Cephalon bid
3 Regeneron Pharmaceuticals ($) 32.83 56.71 73% 2.9 5.0 Eylea breezes through adcom and looks ahead to approval
4 Biogen Idec ($) 67.05 106.92 59% 16.1 25.8 Biogen steals Teva's thunder with BG-12 data
5 Vertex Pharmaceuticals ($) 35.03 51.99 48% 7.1 10.7 Vertex surprises on Incivek price but touts value
Top 5 Fallers
1 Actelion (SFr) 51.20 41.41 (19%) 6.3 6.0 Actelion wins shareholder support as crucial data approaches
2 Shionogi (¥) 1,603 1,315 (18%) 6.6 5.5 Daily Market Movers (26 Apr 11)
3 Gedeon Richter (HUF) 43,039 36,205 (16%) 3.8 3.7 Daily Market Movers (12 Apr 2011)
4 Salix Pharmaceuticals ($) 46.96 39.83 (15%) 2.7 2.3 Bad news on Xifaxan gives Salix investors indigestion
5 United Therapeutics ($) 63.22 55.10 (13%) 3.6 3.2 United alone at celebration party for oral treprostinil

Actelion has had a tough year, fighting off efforts of activist shareholders who wanted to change the management and potentially put the company up for sale. The board prevailed but concerns remain over the pipeline, while news that a US court found against the Swiss drug developer in a spat over a licensing deal also damaged confidence – Actelion last week took a huge $577m charge to cover the award, against which it is currently appealing.

Shionogi has been continuing on its downward trend - the stock has been in decline for a couple of years now – with investors concerned that the Japanese inventor of AstraZeneca’s blockbuster statin Crestor, on which it receives valuable royalties, has little in the pipeline to replace it. A profit warning in April accelerated stock market declines.

Hungarian drug maker Gedeon Richter has been hurt by concerns that tax hikes in its domestic market will hurt profits – a profit warning in February, caused by higher operating costs after a series of acquisitions also dented the stock.

Salix meanwhile has failed to recover from the FDA’s refusal earlier this year to broaden the label of Xifaxan to include irritable bowel syndrome, which would have been a game-changer for the company.

And lastly United Therapeutics has flagged since revealing disappointing phase III results on a major pipeline hope, an oral formulation of its pulmonary hypertension therapy treprostinil.

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