Big cap stocks grow in first half despite M&A activity, not because of it

Indulging in M&A is not the way to bump up share prices as oncology-focused companies prove to be the sector’s darlings.

It is hard to pinpoint where the major feel-good factor has come from for biopharma in the past six months, but resurgent global stock markets have encouraged investors back into the sector.

That said, the market has clearly distinguished between what it considers good and questionable M&A, with the likes of Bristol-Myers Squibb still among one of the worst big cap performers. This situation has not been helped by the US FTC ordering the group to dispose of the blockbuster Otezla to get its $64bn deal with Celgene across the finish line. Abbvie’s acquisition of Allergan also appears to have exacerbated the former’s position as the sector’s wooden spoon winner.

A look at the wider biotech markets shows the recovery seen by the Nasdaq Biotechnology Index in the first quarter has been sustained. Other healthcare indices have risen too, with the 12% jump in the Thomson Reuters European Healthcare index being of particular note. However, Japanese drug stocks have not grown as strongly as others. Alongside ongoing price cuts to Japanese drugs, the wider market has suffered from the rising trade tensions in the region sparked by the recent hostility between the US and China. 

Stock index 6-mth % change 
NASDAQ Biotechnology (US) 13%
S&P Pharmaceuticals (US)  5%
Dow Jones Pharma and Biotech (US)   5%
S&P 500 (US) 17%
DJIA (US) 14%
Dow Jones STOXX 600 Healthcare (EU)   14%
Thomson Reuters Europe Healthcare (EU) 12%
Euro STOXX 50 (EU) 16%
FTSE-100 (UK) 11%
TOPIX Pharmaceutical Index (Japan)  2%

Leaving aside the merits of both Bristol and Abbvie’s choices for future bedfellows, in a dramatic reversal of fortune, Lilly, which graced the top risers in the first quarter, now finds itself near the bottom of the league tables.

The group was boasting record highs for its share price in March, but since then the stock has fallen 16%, with a 4% drop overall in the past six months. Partly to blame is Lilly not hitting investor expectations in key trials for Trulicity and Talz, but a lot of the fall can be blamed on the company lowering full-year revenue forecasts following weaker-than-expected growth for key products. The group also called out pricing pressure and the withdrawal of the cancer drug Lartruvo from the market after it failed in a confirmatory clinical trial as potential brakes to sales.

On the upside, Roche continues to defy expectations, despite the ever-present threat of biosimilars both in Europe and more importantly in the US. Again strong sales of Hemlibra and Ocrevus were behind investors’ willingness to look beyond the biosimilar threat.

The powerhouse that is Keytruda helped to keep Merck & Co in the top flight, while Astrazenca’s wins in lung cancer with Imfinzi and promise in pancreatic cancer for Lynparza have lifted the shares since the beginning of the year.

Big pharma: top risers and fallers in H1 2019
  Share price Market capitalisation ($bn)
  6-mth change 30 June 2019 6-mth change
Top 3 risers
Roche 13% 234.8 24.3
Merck & Co 10% 215.9 17.2
Astrazeneca 11% 108.3 12.1
Top 3 fallers
Abbvie (21%) 107.5 (31.2)
Bristol-Myers Squibb (13%) 74.2 (10.7)
Lilly (4%) 107.6 (15.0)

At the other end of the spectrum Celltrion’s decision to halt production at its main Factory #1 to carry out work to increase production capacity has weighed on that company's shares, as have price cuts for its biosimiliars Truxima and Herzuma, sold through Celltrion Healthcare. Add to this the intensifying competition in the biosimilar market and Celltrion will be hoping there are no delays to getting its main factory back on line in the second half.

Meanwhile, slowing sales for Regeneron’s cash cow, Eylea, which made up pretty much all of the company’s revenues in 2018, is behind the 16% fall in the group's shares, despite good progress from the eczema product Dupixient.

Biogen is still feeling the repercussions of the failure of its much hyped Alzheimer’s candidate aducanumab, which exposed the weakness of its pipeline. The group is now in the tricky position of trying to finding a new way to entice investors back into the fold. While M&A is the most obvious and quickest means of achieving this, the salutary tales of both Abbvie and Bristol’s share prices should offer a much needed note of caution against going down this route without a well thought-out plan.

Other big drugmakers ($25bn+): top risers and fallers in H1 2019
  Share price Market capitalisation ($bn)
  6-mth change 30 June 2019 6-mth change
Top 3 risers
Celgene 44% 65.2 20.4
Allergan 25% 54.9 9.8
Jiangsu Hengrui Medicine 25% 43.5 15.4
Top 3 fallers
Biogen (22%) 45.3 (15.3)
Regeneron  (16%) 33.7 (6.0)
Celltrion (9%) 23.1 (1.6)

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