Stockwatch: The New Pharmaceutical Value Chain
This article was originally published in Scrip
After another week of significant share price volatility among life science stocks the bad news is that the bottom of this current bear market may not yet have been reached. And the worse news is that some significant changes to the pharmaceutical value chain became more apparent last week.
In reviewing most of the characteristics of the last stock market correction I omitted to mention the point that marks the end of a correction: when biotechnology companies are ejected from the NASDAQ Biotech Index (NBI) after significant falls in their share prices. The NBI is rebalanced every six months so it may be a while before this current bottom in the market can be said to have passed. Whilst the correction continues apace a different dynamic is emerging at the profitable end of the pharmaceutical market capitalization spectrum.
On the same day as Sanofi released its mixed and poorly received fourth-quarter results, its partner Regeneron Pharmaceuticals Inc. received a similarly negative investor response to its quarterly announcement. While many investment bank analysts attributed the flattening sales of Regeneron's monoclonal antibody Eylea (aflibercept) for the treatment of back-of the-eye ophthalmic diseases as the main concern, these sales had been pre-announced at the JP Morgan Healthcare conference back in January. My take on investors' concern for both Sanofi, Regeneron, and Amgen Inc., for that matter, is related to the lackluster sales for the anti-PCSK9 monoclonal antibodies for the treatment of high lipid levels. While the analysts attributed the muted sales of Amgen's Repatha (evolocumab) and Sanofi/Regeneron's Praluent (alirocumab) to the absence of positive cardiovascular outcome studies, they should look at Novartis AG's experience with its cardiovascular drug Entresto (sacubitril/valsartan). Entresto has a positive cardiovascular outcome study but last week Novartis still entered into reimburse-on-performance deals with two US payers.
Stringent prior authorization requirements from pharmacy benefit managers (PBMs) are the more likely culprit for Sanofi and Regeneron investors' concern. It is this new paradigm in the pharmaceutical value chain – like NICE in the UK – that can keep patients from new efficacious drugs, profits from innovative companies and value within PBMs and payers. As a result, last year we invested in PBMs for the first time. The share prices of Sanofi and Regeneron both finished last week down about 1.5%, while Amgen closed the week about 1.2% up.
If the top end of the pharmaceutical value chain has had a fender bender, the bottom end – generic drugs – is feeling the effects of a head-on collision. For the last three years the generic pharmaceutical sector has been sensibly facing up to the impending end of its own patent cliff by consolidating and diversifying. Companies like Allergan Plc have been moving up the value chain by acquiring more branded products and most recently divesting their generics heritage. Others like Teva Pharmaceutical Industries Ltd., and Mylan NV have been bulking up their generics divisions. One of the comments I heard from a number of generic pharmaceutical companies at January's JP Morgan conference was their expectations for either static or declining generic drug prices. Only the few recently approved aNDAs, or supply constrained generics seemed to be able to be able to command price increases and even the latter recently felt the icy glare of a Congressional Oversight Panel. For those companies increasingly consolidating generic pharmaceuticals this does not imply much profit growth in the future and Teva's acquisition of Allergan Plc's Actavis generics business and Mylan's acquisition of Meda AB (announced last week) therefore look strategically challenged.
Both Teva and Mylan reported quarterly financial results last week. The analysts from JP Morgan described Teva's earnings per share and declining sales figures as "roughly in-line" but the 2016 guidance from Teva implied a 4-6% generic price erosion in Europe and the US. If bulking up its generics business with the Allergan transaction looks less rosy than when the transaction was conceived, insult was added to injury with its major branded product Copaxone (glatiramer acetate) ironically starting to feel the pressure of generic competition for the first time. If Teva's business model was tilting over the edge, Mylan's was in free-fall last week with fourth-quarter results described as "disappointing" by the analysts at JP Morgan. Like Teva, its generics business and its principal branded product Epipen (epinephrine) were both below JP Morgan's forecasts. While most analysts were distracted away from Mylan's financial results by its proposed acquisition of Meda, investor reaction to the totality of Mylan's announcements was wholly negative. The acquisition of Meda for an eye-watering 92% premium over the previous closing price induced the phrase "wealth-destroying" from the analysts at Cowen while those from Citigroup "struggle[d] to justify the high price paid".
With Teva's and Mylan's share prices finishing the week down 4.3% and a staggering 17.8%, respectively, investors are starting to question the high prices paid for generic assets which are now accompanied by broad price deflation. By comparison, branded pharmaceuticals even with their recent pricing pressures, look a much better place to be.
NB The Magna Biopharma Income fund holdings include Regeneron, Amgen and Allergan.
Andy Smith is chief investment officer of Mann Bioinvest. Mann Bioinvest is the investment adviser for the Magna BioPharma Income fund which has no position in the stocks mentioned, unless stated above. Dr Smith gives an investment fund manager's view on public life science companies. He has been lead fund manager for four life science–specific funds, including International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the Technology Fund Manager of the year for 2007.