Nine months into 2014, big drug stocks post strong performance

Being considered one of the most controversial drug developers has not done Lilly any harm. The company ranks as the best-performing big pharma stock so far this year, besting even the bid target AstraZeneca.

Our quarterly look at share price performances also shows just how in favour the sector is at the moment. Among the world’s biggest drug makers very few were nursing losses through the end of the third quarter, making the declines seen at GlaxoSmithKline, Bristol-Myers Squibb, Pfizer, Takeda all the more disappointing (see tables below).

Stock index % change in 9 months
NASDAQ Biotechnology (US) 21%
S&P Pharmaceuticals (US)  14%
Dow Jones Pharma and Biotech (US)   17%
S&P 500 7%
DJIA 3%
Dow Jones STOXX Healthcare (EU)   21%
Thomson Reuters Europe Healthcare (EU) 9%
Euro STOXX 50 4%
FTSE-100 (2%)
TOPIX Pharmaceutical Index (Japan)  10%

As has been the case for the past few quarters, a look at the broader indices clearly demonstrates drug stocks’ outperformance. This is notable in the US and Europe, with both the Nasdaq Biotechnology Index and the Dow Jones Stoxx Healthcare index notching up 21% gains so far this year.

The ongoing wave of sector M&A has undoubtedly contributed to the climb in drug indices, as has a perceived improvement in R&D productivity. At the same time concerns about the fragility of economic recoveries and unrest in many parts of the world have helped increase the attractiveness of so-called defensive stocks like drug makers.

There are 32 companies in our analysis of big pharma and other large drug makers, classified as those with a market cap above $25bn at the start of 2014. The fact that only four have registered declines this year illustrates the broad attractiveness of the sector.

Big pharma companies: top risers and fallers in 9 months
Share price (local currency) Market capitalisation ($bn)
Top 3 risers YE 2013 9M 2014 Change End 9M 2014 Change YTD
Eli Lilly $51.00 $64.85 27% 72.5 15.0
AstraZeneca $59.37 $71.44 20% 90.2 15.7
Merck & Co $50.05 $59.28 18% 171.0 24.8
Top 3 fallers
GlaxoSmithKline £16.12 £14.13  (12%) 116.9  (11.2)
Bristol-Myers Squibb $53.15 $51.18  (4%) 84.9  (2.7)
Pfizer $30.63 $29.57  (3%) 187.5  (11.0)

GlaxoSmithKline has lost the most in terms of percentage share price and erosion of market value as concerns about long-term growth prospects hit hard, particularly with its respiratory franchise (Glaxo drops the ball in fierce US respiratory pricing climate, August 4, 2014). The group also lost its chairman and took a big dent to its reputation this year, as the Chinese bribery scandal took its toll. 

Bristol-Myers Squibb is continuing to suffer from a perceived misstep in the race to bring novel immunotherapies to the market, although to put this in context the company was the top big pharma gainer in 2013, when its stock advanced by a huge 63%.

Where BMS has lost Merck & Co is considered to have benefited. Merck achieved the first US approval for an anti-PD-1 antibody, Keytruda, last month and its progress with this compound has a lot to do with its gain in value this year.

The progress of gainer AstraZeneca and faller Pfizer is also intertwined. While AstraZeneca has benefited from a revaluation of its pipeline in the wake of Pfizer’s approach – and hope that the bidder will return – the US drug giant has been forced to defend the viability of its ongoing businesses without a big acquisition.

Finally, Lilly’s performance is perhaps the most notable. The company remains a rare devotee of a big R&D budget and has a large and arguably risky phase III pipeline that needs to deliver to justify its valuation.

It has enjoyed successes this year – for example with approvals of ramucirumab in lung cancer and the diabetes drug Truclicity – but it has also seen setbacks, as with its attempts to bring new insulins to market. For now, investors seem prepared to give the company the benefit of the doubt.

Other large cap (>$25bn): top risers and fallers in 9 months
Share price (local currency) Market capitalisation ($bn)
Top 3 risers YE 2013 9M 2014 Change End 9M 2014 Change YTD
Shire $141.29 $259.05 83% 50.9 23.3
Allergan $111.08 $178.19 60% 53.0 19.9
Actavis $168.00 $241.28 44% 63.8 19.4
Top 3 worst performers
Takeda ¥4,825 ¥4,768  (1%) 37.0  (2.0)
Baxter International $69.55 $71.77 3% 38.9 1.1
Fresenius € 37.20 € 39.26 6% 28.7 1.3

Outside big pharma, sector consolidation is a dominant theme. Shire is top riser thanks to a successful bid from AbbVie which, despite moves by the US to limit the attraction of overseas inversions, looks likely to be completed.

Allergan is still defending itself against Valeant, a situation that is likely to continue into next year. Actavis features thanks to its success on the other side of the table – it completed the $28bn takeover of Forest Laboratories earlier this year.

The fallers in this cohort can hardly be described as such, although their relative performance is certainly a disappointment.

Takeda is struggling to convince investors that it can replace revenues lost from a number of big patent expiries, such as its heart pill Blopress and multiple myeloma treatment Velcade. And Baxter’s weak performance this year has come despite the group’s announcement that it will spin off its drug development arm.

It is notable that Baxter and Fresenius is closely followed in this analysis by CSL – the relative underperformance of these companies, all heavily involved in blood products, could well indicate the difficulties that this sector is facing, not least the introduction of bundled dialysis payments in the US. It could also, of course, reflect the lack of M&A action in this area, compared with the speciality pharma sector.

Moves by US lawmakers on overseas acquisitions could well cause the consolidation wave to subside in the coming months. But there is enough energy in the tide to maintain interest in these companies for now, leaving the drug sector on track for an impressive year on the stock markets.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @AmyEPVantage on Twitter

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