Pharma Q2 Preview: Demonstrating Resiliency Against A Turbulent Backdrop
Executive Summary
Inflation, rising interest rates, market volatility, violence in Ukraine and a persistent pandemic created a chaotic macroenvironment for doing business. Pharma appears poised to grow, nonetheless.
When market conditions get choppy, pharmaceutical manufacturers usually float above the fray, but the second quarter of 2022 has certainly put the industry's standard stability to the test. The macroenvironment has delivered one volatile punch after another – inflation, supply constraints, labor shortages, rising US interest rates, a prolonged military conflict in Ukraine and a pandemic that continues to disrupt communities and business operations.
Amidst this turmoil, drug makers are poised to report second quarter sales and earnings, beginning with Johnson & Johnson on 19 July, and the world's biggest pharma companies are generally expected to deliver modest growth despite various uncertainties and challenges.
Investors will be anxious to hear more about how drug makers are executing on new drug launches, pipeline advancements and focused business strategies while navigating the disruptive macro trends.
In big pharma's favor are an array of dependable brands that continue to deliver growth on blockbuster-sized sales – drugs like Merck & Co., Inc..'s Keytruda (pembrolizumab), Pfizer Inc. and Bristol Myers Squibb Company's Eliquis (apixaban), Johnson & Johnson's Darzalex (daratumumab), Novartis AG's Cosentyx (secukinumab) and Sanofi/Regeneron Pharmaceuticals, Inc.'s Dupixent (dupilumab). In addition, there is a top-line revenue bump coming from various vaccines and treatments for COVID-19. Pfizer is the big winner there, with both the vaccine Comirnaty and antiviral Paxlovid, but others like Moderna, Inc., Pfizer's partner BioNTech SE, Merck, Eli Lilly and Company, GlaxoSmithKline Pharmaceuticals Ltd. and Gilead Sciences, Inc. have also benefited. (Also see "COVID-19 Gives US Biopharma Plenty Of Q1 Cover" - In Vivo, 23 May, 2022.)
Few big sellers are going off patent until 2023, after which a steady stream of big exclusivity losses will hit the sector, starting with AbbVie Inc.'s Humira (adalimumab) and J&J's Stelara (ustekinumab) and running through the latter half of the decade. (Also see "The Next Big Patent Cliff Is Coming, And Time Is Running Out To Pad The Fall" - Scrip, 4 Apr, 2022.)
As the uncertain macroenvironment has created stock market volatility, investors appear to be turning to steadier areas like big pharma. The global pharmaceutical stock index DRG was roughly flat in the second quarter while volatility roiled other sectors. The S&P 500 fell 16.7% in the second quarter and the biotech fund known as the XBI fell 17.8%.
"We expect pharma to remain a defensive sector until visibility improves on inflation and interest rates, with recent positive catalysts (obesity data sets, ASCO) driving stocks higher amidst diminishing Washington and FTC overhangs," Guggenheim analyst Seamus Fernandez said in a research note on 8 July.
Morgan Stanley analyst Terence Flynn agreed, calling big pharma a "a prescription for defensive growth."
With threats of a global recession putting investors on edge, Flynn pointed out that big pharma businesses have tended to remain steady during prior recessions. A historical analysis showed that US drug volume slowed during prior recessions but remained positive and that while revenue growth slowed slightly, drug makers were able to maintain pre-recession operating margin and cash-flow.
"Hence, we expect biopharma revenues will remain resilient if economic activity slows," Flynn said. "We continue to believe companies that can deliver revenue growth in the second half of the decade are best positioned."
Few Big Surprises
While big pharma manufacturers are not expected to announce any big disruptions to their business operations, the second quarter financial reports may not deliver much in the way of positive surprises either as drug makers stick to executing on fundamentals and meeting sales and earnings guidance.
Analysts generally agree Merck appears best positioned to impress investors with a better-than-expected quarter, driven by strong growth of Keytruda and Gardasil, but foreign exchange is also expected to be a complicating headwind for US pharma companies due to a strengthening US dollar, offsetting some growth.
Merck is also benefiting this year from sales of its COVID-19 treatment Lagevrio (molnupiravir), but the antiviral has taken a back seat to Pfizer's Paxlovid (nirmatrelvir/ritonavir) and it remains unclear how far the revenue boost will carry Merck. The company narrowed the 2022 revenue guidance for Lagevrio to $5bn-$5.5bn at the first quarter results announcement. (Also see "Merck & Co.'s Solid Growth Turbo-Charged By Lagevrio For COVID-19" - Scrip, 28 Apr, 2022.)
Pfizer could raise its financial guidance, mainly to reflect a new US government contract for its COVID-19 vaccine Comirnaty, which it shares with BioNTech, after the US agreed to pay $3.2bn in June for 105 million doses of the vaccine. (Also see "Pfizer Sees Expanded Access To Paxlovid With Pharmacist Prescribing" - Scrip, 6 Jul, 2022.) Pfizer's original 2022 sales forecast of $98bn to $102bn included Comirnaty revenues of $32bn and Paxlovid revenues of $22bn, but that guidance was laid out to investors in February, based on contracts signed or committed to as of late January, and was not updated at the first quarter. (Also see "Pfizer Is Changed ‘Forever’ By COVID-19; Revenue Forecast Hits Triple Digits" - Scrip, 8 Feb, 2022.)
Lilly may also be a second quarter winner, with the company benefiting from the sale of additional doses of its COVID-19 antibody bebtelovimab to the US government announced on 29 June. Lilly agreed to supply an additional 150,000 doses of the antibody for $275m under a modified US government contract.
Investors are also keenly focused on the launch of Lilly’s Mounjaro (tirzepatide), a first-in-class GLP-1/GIP1 agonist for type 2 diabetes that is expected to be a big blockbuster, especially if it also secures approval for obesity. Mounjaro was approved for diabetes by the US Food and Drug Administration in May and analysts say the early launch trajectory already looks strong. (Also see "Lilly’s Mounjaro Diabetes Approval Is First Challenge To Novo’s GLP-1 Franchise" - Scrip, 13 May, 2022.)
New prescriptions of Mounjaro for the week of 1 July were 7,800 versus 5,000 the prior week, Morgan Stanley's Flynn said in a research note, citing IQVIA data. "It is very early in the launch of the drug but this compares favorably to the initial Trulicity and Ozempic launches," he said, referring to Lilly's and Novo Nordisk A/S's blockbuster GLP-1 inhibitors.
Among the other new drug launches investors will be tracking across the sector are Novartis's Leqvio (inclisiran) for high cholesterol, Bristol's Camzyos (mavacamten) for hypertrophic cardiomyopathy, Roche Holding AG's Vabysmo (faricimab) for wet age-related macular degeneration, Pfizer's Cibinqo (abrocitinib) for atopic dermatitis, AstraZeneca PLC/Amgen, Inc.'s Tezspire (tezepelumab) for asthma and AstraZeneca's Enhertu (fam-trastuzumab deruxtecan) for breast cancer, among others.
M&A: Always On Investors' Minds
Commentary on M&A is always a highlight during sales and earnings season, both for biotech investors who are eager to see the pace of business development pick up momentum and pump energy back into biotech stocks, and for pharma investors looking for clarity on how large drug makers intend to sustain growth into the latter part of the decade.
The expectation was that it would be a busy year for biopharma M&A this year, but the activity hasn't materialized the way some expected, partly because of the ongoing market volatility and uncertain macroeconomic factors. (Also see "Volatility And Valuations Among Factors Weighing On Pharma Deal Making" - Scrip, 11 May, 2022.)
That could change, however. Merck & Co. is rumored to be in late-stage discussions to buy cancer specialist Seagen Inc. in a deal that could represent the largest M&A play of the year, so far. (Also see "Merck & Co Closing In On Seagen Acquisition" - Scrip, 8 Jul, 2022.)
Any update from Merck CEO Robert Davis on business development strategy, or about the size of a deal that Merck may be willing to do, will be closely followed. It is possible the company could even have a signed deal ahead of its second quarter announcement on 28 July. Seagen's second quarter call coincidently is scheduled for the same day and will be the firm’s first quarterly call since founder and longtime CEO Clay Siegall resigned in May amid a personal scandal. (Also see "Seagen CEO Search Under Way As Longtime Leader Siegall Resigns In Scandal" - Scrip, 16 May, 2022.) The company's stock price is up 19% to $176.79 since the M&A speculation surfaced on 17 June.
Merck isn't the only company investors are watching, however, when it comes to M&A. Pfizer has been an active acquirer and has more to invest in building out its pipeline. Pfizer has committed to using business development to add $25bn to risk-adjusted revenues by 2030 and has completed several bolt-on deals, including the $6.7bn acquisition of Arena Pharmaceuticals, Inc., the $525m acquisition of ReViral Ltd. and an $11.6bn deal to buy Biohaven Pharmaceutical Holding Company Ltd.'s migraine portfolio. (Also see "Pfizer To Put Big Marketing Muscle Behind Migraine With Biohaven Purchase" - Scrip, 10 May, 2022.)
Sanofi and Merck have been the most active acquirers since 2018, Sanofi with 10 acquisitions and Merck with seven, Needham analyst Joseph Stringer said in an 8 July note on the M&A environment.
"Pharma overwhelmingly prefers to buy late-stage/commercial companies," he said based on a historical deal review. "For M&A of public companies 43% of targets had at least one marketed drug. Taken one step further, 69% had their lead asset/program in Phase III development or later."