With so much talk of patent cliffs and biosimilar regulatory pathways, 2009 is shaping up to be a boom time for investors in generic companies, a half-yearly analysis of stock performance by EP Vantage has revealed.
Alongside Teva Pharmaceutical (NYSE:TEVA), as a rare big pharma stock to register a gain in the first half of the year, all five of the biggest winners for mid-cap companies were generic, with the average gain for global generic stocks a healthy 28% (see tables below). In comparison, the average decline for big pharma was 11%, excluding the bid targets Wyeth (WYE) and Schering-Plough (SGP). With cuts to dividend payouts and scrapping of share buy-back schemes compounding the patent risk exposure of big pharma, it seems investors are switching their allegiance to the generic companies which will profit the most from the woes of big pharma (Vantage Point - boom time for generics as patent cliff looms large, May 18, 2009).
The picture for the first half of the year for big and mid-cap pharma stocks confirms a trend seen in the first quarter (Generic companies come out on top in first quarter of 2009, April 1, 2009).
Outside of the bid targets, the only stocks to register a gain over the first half of 2009 were Teva and Alcon (NYSE:ACL).
Shares in Alcon, the eye-care specialist, have essentially been staging a recovery from a surprise profit warning last October that wiped 34% from the company’s market value in one week. The strengthening dollar, slower US sales and fears about generic competition to key products were to blame. The shares hit a five-year low of $71.90 in November, and have been on an upward trend since.
Novartis (NYSE:NVS), one of the worst performers this year, currently owns a 25% stake in Alcon, bought in April last year from Nestle (OTCPK:NSRGY) at $143 a share. The company has an option to buy Nestle’s remaining 52% stake between January 2010 and July 2011 for $181 per share. Meanwhile Nestle has an option to sell its stake to Novartis at a premium of 20.5% to the market price, not exceeding $181.
With six months to go before either company can exercise its option, whether Alcon’s share price continues its upward trajectory for the remainder of the year will be followed with interest.
Takeda (OTCPK:TKPHF) was the worst performing big cap drugmaker so far this year. The gradual downward slide in the stock turned into a plunge in March when the FDA constructed a large brick wall in front of the Japanese company’s most important future sales growth driver, diabetes drug alogliptin. The drug is now facing a worst-case scenario of not reaching the market until 2013 (Alogliptin disappointment continues for Takeda, June 29, 2009).
Fears about the impact of the new US administration’s health plans on drug companies’ profits are evident when looking at pharma stock indexes, all of which registered a big drop off at the end of February (US health reforms make markets jittery, February 27, 2009). Among the majors, Novartis and GlaxoSmithKline (NYSE:GSK) appear to have struggled the most to recover from this event, which hit healthcare shares across the board.
Declines at Eli Lilly (NYSE:LLY) have probably been exacerabated by concerns about its diabetes franchise, whilst Pfizer (NYSE:PFE) shares have failed to recover from the shock of the Wyeth takeover, announced at the end of January just before the US health reforms, a perfect storm which sent the stock to a 12-year low in March.
Rise of the generic players
All five of the biggest gainers of mid-cap companies in the first half of the year are generic companies, or, like Hospira (NYSE:HSP), have significant generic operations.
In addition to the five listed here, the likes of Dr. Reddy’s Laboratories and Krka have also registered impressive gains, of 66% and 45% respectively, although they were not officially classified as a mid-cap company at the start of the year, having had a market capitalisation lower than $2.5bn.
Abraxis Biosciences and Endo Pharmaceuticals have suffered the most so far this year.
Endo has experienced a certain amount of investor dissatisfaction over its progress and fears about its future, compounded by the ill-received acquisition of Indevus at the beginning of January. Concerns mounted following the merger of two big players in the pain sector, King Pharmaceuticals (KG) and Alpharma (NYSE:ALO), seen as strengthening the competition.
Abraxis’ (ABBI) decline has occurred as the company bought back US rights to its cancer drug Abraxane from AstraZeneca (NYSE:AZN), and focus on building its own commercial infrastructure; a move that shareholders do not seem to have appreciated.
Cephalon’s (NASDAQ:CEPH) sale of $300m worth of shares and $350m worth of convertible debt in May prompted a big sell off, the stock touched a two-and-a-half year low at one point and has not staged any sort of recovery since then.
Japanese companies are over represented among the biggest mid-cap fallers; also hovering just outside the bottom five are Mitsubishi Tanabe Pharma (OTC:MTZXF) and Hisamitsu Pharmaceutical (OTC:HTSUF). The Japanese Pharma index dropped 11% in the first half. Takeda’s woes will have had a big impact, as would Daiichi’s (OTC:DSKYY) ongoing wrangles with Indian unit Ranbaxy (OTC:RBXLF), which got into trouble with the FDA over falsifying test results.
Disclosure: No Positions