Novo leads big pharma recovery in third quarter as Roche tumbles

Big pharma stocks returned to favour among investors during the third quarter. A look at share price performance of the largest drug makers at the nine month stage shows a notable improvement from three months ago when only two stocks, Novo Nordisk and AstraZeneca, managed to notch up gains (Big pharma continues to struggle in first half, Indian generics consolidate gains, July 1, 2010).

Although the picture is more balanced now there remain clear winners and losers in this group, with diabetes specialist Novo Nordisk continuing to go from strength to strength and Roche suffering a notable desertion of investor confidence after multiple pipeline setbacks. Meanwhile among the mid-caps a resurgence of biotech stocks has ended the dominance of Indian generics firms in the biggest gainer list (see tables below).

Big pharma analysis

Large cap ($30bn+) pharma companies: top risers and fallers in 9M 2010
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 Risers 31-Dec-09 30-Sep-10 % change YE 2009 9M 2010
1  Novo Nordisk (DKr) 336.0 542.5 +61% 40.8 45.9
2  AstraZeneca ($) 45.55 50.70 +11% 66.1 72.3
3  Novartis ($) 52.48 57.67 +10% 119.0 128.0
4  Bristol-Myers Squibb ($) 24.95 27.11 +9% 42.8 46.5
5  Eli Lilly ($) 34.72 36.53 +5% 39.9 42.1
Top 5 Fallers
1  Roche (SFr) 170.12 134.20 -21% 144.1 110.9
2  Baxter International ($) 58.39 47.71 -18% 35.2 27.9
3  Gilead Sciences ($) 43.27 35.61 -18% 38.9 29.9
4  Bayer (€) 55.96 51.08 -9% 67.5 54.1
5  Takeda (¥) 4,115 3,835 -7% 35.8 34.6

The gradual recovery of big pharma stocks is reflected in the fact global healthcare stock market indices are now essentially flat over the year; at the half-year mark these indices were registering significant losses. The notable exception here is the outstanding performance of the Indian healthcare index, buoyed by wider economic growth in the country. The share prices of many Indian pharma companies now trade at record highs.

Stock Market Index  % change in 9M 2010
Dow Jones Healthcare (US)   -1%
S&P Pharmaceuticals (US)  -2%
AMEX Pharmaceutical (US)  0%
Dow Jones STOXX Healthcare (EU)   +3%
TOPIX Pharmaceutical Index (Japan)  -7%
Thomson Reuters India Healthcare (India) +20%

Novo’s share price gain this year is remarkable. Regulatory approval and successful launch of diabetes drug, Victoza, coupled with positive pipeline developments such as long-acting insulin, Degludec, have boosted investor confidence. Meanwhile clinical setbacks to Roche’s taspoglutide and safety scares for Sanofi-Aventis’ long-acting insulin, Lantus, have played into Novo's hands.

AstraZeneca maintained its momentum in the third quarter, sparked by a vital court victory at the end of June to defend its core patents on Crestor until 2016. A positive FDA advisory committee review and European approval for blood thinner, Brilinta, helped build on these gains.

Novartis’ shares now trade at a two-year high, driven in the third quarter by FDA approval for the first oral pill for MS, Gilenya, and the gradual removal of uncertainty over its ability to close out the acquisition of Alcon and benefit financially from the move.

The fallers

Pipeline setbacks buffeted Roche in the third quarter. Avastin failed as adjuvant treatment in early stage colon cancer and its use in metastatic breast cancer is under regulatory threat on both sides of the Atlantic (Event – Roche announces timely efficiency drive as Avastin decision looms, September 3, 2010). In addition, its move into diabetes has foundered on the shoals as Roche stopped dosing in a late-stage trial of GLP-1 agonist taspoglutide. Investors are hoping that a big restructuring review, details on which are due before the end of the year, will demonstrate Roche has a handle on the situation.

Baxter has so far failed to recovery from serious oversupply issues in the blood plasma market (Shares in plasma companies bleeding value over slowdown fears, April 26, 2010), while Gilead continues to suffer from doubts about growth prospects and the patent life of its HIV franchise (Gilead hurt by faltering confidence, July 19, 2010).

Mid cap analysis

Biotech stocks re-emerged from the shadow of generics in the mid-caps during the third quarter. Dendreon and Genzyme were driven by external events while Alexion's shares have been on a more gradual rise as Soliris continues to exceed market expectations.

Following FDA approval for Dendreon's prostate cancer vaccine, Provenge, earlier this year expectations for the product's commercial potential remain high, despite recent concerns over the US government’s Medicare review and coverage decision on the $93,000-a-year drug (Event - Provenge goes another round with the regulators, September 29, 2010).

Sanofi-Aventis’ bid to buy Genzyme lifted shares in the troubled biotech during the third quarter, although the final act of that saga has yet to be performed and could still be a long way off (Sanofi hungry for deal and Genzyme could be on the menu, July 26, 2010).

Alexion's shares have broken into record high territory in recent weeks, boosted by the performance of Soliris, an antibody to treat the rare blood disease paroxysmal nocturnal haemoglobinuria. Sales of the world’s most expensive drug continues to beat projections, causing a further round of analyst upgrades (Alexion riding high on Soliris' potential, September 29, 2010).

Sun Pharmaceutical is now the sole representative from the Indian generics sector, its shares trading at record high levels. The company is about to finally complete its acquisition of Israeli generics group, Taro Pharmaceutical Industries, three years after making its original approach. The acquisition should significantly extend Sun’s global reach and manufacturing capabilities.

Mid cap ($2.5bn-$30bn) pharma companies: top risers and fallers in 9M 2010
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 Risers 31-Dec-09 30-Sep-10 % change YE 2009 9M 2010
1  Perrigo ($) 39.73 64.22 +62% 3.6 5.9
2  Dendreon ($) 26.28 41.18 +57% 3.4 5.9
3  Genzyme ($) 49.01 70.79 +44% 13.0 18.0
4  Sun Pharmaceutical Industries (Rs) 1,507 2,019 +34% 6.6 8.9
5  Alexion Pharmaceuticals ($) 48.82 64.36 +32% 4.3 5.8
Top 5 Fallers
1  Dainippon Sumitomo Pharma (¥) 1,181 699 -41% 5.2 3.2
2  Ipsen (€) 38.76 24.32 -37% 4.8 2.6
3  Actelion (SFr) 55.20 39.37 -29% 6.4 4.8
4  Shionogi (¥) 2,010 1,528 -24% 7.4 6.1
5  Warner Chilcott ($) 28.47 22.44 -21% 7.2 5.7

Among the fallers, Actelion and Ipsen suffered further pipeline setbacks in the third quarter.

Among the top five mid-cap fallers all year long, Actelion reeled again on news that key pipeline candidate, clazosentan, failed to prevent subarachnoid haemorrhage in a phase III trial (Actelion can’t catch a break after another phase III failure, September 27, 2010).

Ipsen lost out when partner Roche announced it ceased dosing patients in an advanced trial of GLP-1 agonist diabetes candidate taspoglutide (Taspo suspension appears terminal, September 13, 2010).

Dainippon's investors, along with analysts, continue to be disappointed in the company’s $2.5bn acquisition of Sepracor last year, viewed as too expensive and of questionable strategic value while higher-than-expected transaction costs have subsequently emerged.

Finally, Shionogi suffered significant losses at the start of August when it lowered its financial outlook for the full year. Multiple analysts subsequently downgraded the stock, which sunk to a four-year low of ¥1,464 at the beginning of September.

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