Big biopharma not the best investment so far in 2018

Trade war and pricing worries weigh heavily on the sector's giants.

Quarterly shareprice performance

It is a good year for investors to stay away from big biopharma. Darlings of the sector have received some comeuppance in 2018, while a surprise has emerged in the guise of Glaxosmithkline, which led all big cap groups with a healthy 16% gain in the first six months of 2018.

Big pharma, of course, is more prone than small biotech to movements on macro issues like trade and economic growth, so it is hard to pin the sector’s slump solely on corporate performance. Still, companies like Roche and Bristol-Myers Squibb have a lot of explaining to do as they have let rival Merck & Co steal the show in immunotherapy, a field that remains highly competitive.

Taxes, prices and trade

Broad indicators do not paint a picture of health for big cap biopharma. Both the Dow Jones and S&P sector-specific indices declined in the US, along with their European counterparts, largely mirroring the movements of the broader markets.

Stock index 6mth change 
Nasdaq Biotechnology (US) 3%
S&P Pharmaceuticals (US)  (5%)
Dow Jones Pharma and Biotech (US)   (3%)
S&P 500 (US) 2%
DJIA (US) (2%)
Dow Jones STOXX Healthcare (EU)   (1%)
Thomson Reuters Europe Healthcare (EU) (2%)
Euro STOXX 50 (EU) (3%)
FTSE-100 (UK) 0%
TOPIX Pharmaceutical Index (Japan)  3%

The talk of a global trade war instigated by the US surely cannot be helping any multinational company like a big pharma group. Meanwhile the sector-specific risk of US government action to limit drug price increases still haunts investors, and rhetoric could intensify as the November mid-term elections approach.

These threats served as a counterweight to the most important news for big pharma in the early months of the year: massive reduction to future US tax liabilities.

With that as a backdrop, Glaxo’s 16% gain looks impressive. Taking full control of the former consumer health joint venture with Novartis seems to have perked up investors, along with a relaunched oncology strategy. An improving outlook for the shingles vaccine Shingrix and cancer asset GSK2857916, which aims to beat CAR-T at its own game, have also helped.

Big pharma: top risers and fallers in H1 2018
  Share price (local currency) Market capitalisation ($bn)
  6-mth chg H1'18 6-mth chg
Top 3 risers
Glaxosmithkline 16% 106.8 18.9
Merck & Co 8% 163.3 11.6
Astrazeneca 1% 88.9 1.2
Top 3 fallers
J&J (13%) 325.5 (49.4)
Roche (11%) 197.0 (18.3)
Novartis (10%) 192.7 (1.9)

Talking of immuno-oncology, Merck’s nearly uninterrupted string of wins with Keytruda over all contenders has served it well, allowing it to chalk up an 8% advance. Roche provides the opposite picture here: the usually steady Swiss pharma giant was in the losers column as it became increasingly apparent that Tecentriq was being frozen out by Keytruda in the all-important lung cancer indication.

Also on the losing side, Johnson & Johnson is gradually seeing the strong gains of last year eroded as concerns over its drug pipeline grow. Not helping is the fact that the company did not receive as much tax relief as counterparts like Abbvie, causing a tumble in the midst of the year-end reporting period. This was followed by a disappointment in May in a combination trial of Roche’s checkpoint inhibitor Tecentriq with Darzalex, J&J’s most important drug.

Celgene deflation

Beyond the traditional big pharma names, the dominant topic of conversation in big biopharma has to be Celgene’s fall from grace. The company bled away $21bn in market capitalisation over the course of six months after a series of missteps that included a refuse-to-file letter for its multiple sclerosis asset ozanimod, a dimming outlook for Revlimid, and an expensive acquisition of the CAR-T player Juno.

Amgen’s rising stock price and falling market cap can be explained by a huge share buyback. Although the strategy won the company a spot in the top three climbers, such programmes are increasingly being criticised by investors for representing unimaginative financial engineering, when what beleaguered big biotech really needs is innovation.

Other big drug stocks ($25bn+): top risers and fallers in H1 2018
  Share price (local currency) Market capitalisation ($bn)
  6-mth chg H1'18 6-mth chg
Top 3 risers
Vertex 13% 43.3 5.4
Shire 9% 51.4 4.0
Amgen 6% 122.1 (3.4)
Top 3 fallers
Takeda (27%) 34.5 (11.3)
Celgene (24%) 57.6 (21.7)
Novo Nordisk (12%) 119.5 (10.5)

M&A posed a problem for Takeda, the biggest faller of the first half in this group. Rumours that it wanted to take out Shire were not well received, and the final price is likely to require it to take on more debt. Clearly, the proposed deal has served Shire shareholders well.

Novo Nordisk continues to be the victim of shifting payer attitudes in diabetes – despite launching a weekly GLP-1, Ozempic, to compete with Trulicity and clinical progress towards an oral GLP-1, its dependence on an increasingly commoditised insulin franchise makes it vulnerable to hard-nosed negotiating.

On the positive side, Vertex has continued to prevail in cystic fibrosis, expanding its armoury of doublets and triplets. Galapagos’s failure to catch up – possibly losing partner Abbvie along the way – only reinforces the virtually unassailable position Vertex has made for itself.

To contact the writer of this story email Jonathan Gardner in Virginia or Joanne Fagg in London at news@epvantage.comor follow @ByJonGardner or @ByJoFaggon Twitter

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