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Drug pricing is an issue that has been weighing on pharma and biotech stocks for more than a year now. The sector, which previously had a stellar run, started its downward trend in Sep 2015 when a single tweet by Democratic Presidential candidate Hillary Clinton sent pharma and biotech stocks tumbling. Clinton’s “price gouging tweet" was in response to a huge price hike (about 5,000%) taken by Turing Pharmaceuticals for a drug that was approved by the FDA way back in 1953.
Since then, focus on the drug pricing issue has gone up and companies like Valeant have seen their share prices plunging as they find themselves in the midst of the drug pricing controversy.
Although pharma and biotech shares rallied post-election in November on hopes that drug pricing would not be a key focus area under a Donald Trump presidency, the relief rally turned out to be short-lived following President Trump’s views regarding drug pricing. Trump made it clear that he does not like what happened to drug prices and he will bring down drug prices.
According to the Jan 2017 Kaiser Health Tracking poll, affordability of prescription drugs remains at the top of the public’s priority list for the President and Congress -- focus should be on ensuring the affordability of high-cost drugs to people who need them and taking steps to lower prescription drug prices.
Given the current scenario, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.
Biosimilars Changing the Competitive Scenario
Another challenge being faced by the sector is the recent entry of biosimilar competition in the U.S. While a relatively new area, the market for biosimilars is huge and highly lucrative with several blockbuster biologics including Humira and Lantus slated to lose patent protection by 2020. Biosimilars are expected to reduce healthcare costs and provide a large number of patients with access to much needed biologic treatments.
According to research released by the IMS Institute for Healthcare Informatics last year, increasing acceptance of biosimilars across different therapeutic areas plus an active pipeline of 56 candidates are expected to lead to total savings of about $110 billion to health systems across Europe and the U.S. through 2020.
The report further says that by 2020, biosimilars will start competing with biologics that have annual sales of $50 billion. Several companies are working on bringing biosimilars to market for reference products like Johnson & Johnson’s Remicade, Amgen’s (AMGN - Free Report) Enbrel, Roche/Biogen’s Rituxan and AbbVie’s (ABBV - Free Report) Humira.
Biosimilars are also gaining acceptance across formularies. CVS Health announced that biosimilars and follow-on biologics will be a key part of its 2017 standard formulary strategy, replacing higher cost drugs within the categories. Similar steps have been taken or are being contemplated by other formularies as well.
Although there is still low visibility on how well biosimilars will perform or how much of the market they will be able to capture, the focus on making expensive drugs more affordable and formulary coverage for biosimilars could very well make it challenging for innovator companies to hold on to market share for their blockbuster drugs.
Will New Products Make Up for Lost Sales?
Quite a few of the big players in the drug industry are looking at loss of patent protection for major blockbuster drugs. With generics and biosimilars breathing down their necks, many of these companies are looking towards new products to pick up the pace and make up for lost sales. While several new products were approved last year, many like Orkambi, Repatha and Praluent failed to live up to expectations.
Fewer FDA Approvals in 2016
There was a notable dip in FDA novel drug approvals in 2016 with the agency giving its nod to 22 treatments during the year. Compare this to 45 approvals in 2015 and 41 in 2014 and the 2016 numbers look really disappointing.
It’s not like a fewer number of applications were submitted in 2016 -- as of Dec 9, 2016, 36 new molecular entity (NME) applications were submitted, in line with the average NME filings of 35 over the past decade.
However, a pretty high number of applications got complete response letters (CRLs) from the agency -- a CRL is issued by the FDA to inform the company that its application will not be approved in its present form. There could be several reasons for the same including insufficient data to support approval as well as manufacturing issues.
Some of the drugs that got CRLs in 2016 include Spectrum Pharma’s Qapzola (immediate intravesical instillation post-transurethral resection of bladder tumors in patients with non-muscle invasive bladder cancer), Dynavax’s experimental hepatitis B vaccine Heplisav-B, Advanced Accelerator’s Lutathera (treatment of gastroenteropancreatic neuroendocrine tumors in adults), Sanofi (SNY - Free Report) and Regeneron’s sarilumab (rheumatoid arthritis), and AstraZeneca’s (AZN - Free Report) ZS-9 (hyperkalemia). While both AstraZeneca and Sanofi are Zacks Rank #3 (Hold) stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, although President Trump spoke about speeding up the FDA approval process, his memorandum ordering a freeze on the hiring of Federal employees provides low visibility on how this will impact the FDA. Concerns remain that a hiring freeze at the FDA will negatively affect development programs and the review of new drugs and medical devices.
Stocks to Avoid
As concerns surrounding the drug pricing issue continue to keep the sector volatile, it would be prudent to stay away from stocks that have not been able to win analysts’ confidence and carry an unfavorable Zacks Rank:
Novo Nordisk A/S (NVO - Free Report) : Novo Nordisk, a Zacks Rank #4 (Sell) stock, missed earnings expectations in the fourth quarter of 2016. The insulin segment will remain under pressure due to competition and tough pricing. Earnings estimates for 2017 and 2018 are down over the past 30 days. Novo Nordisk has significantly underperformed the Zacks categorized Large Cap Pharmaceuticalsindustry over the last one year with shares declining 30.8% compared to the industry gain of 9.1%.
Gilead Sciences Inc. (GILD - Free Report) : Gilead, a Zacks Rank #4 stock, is witnessing significant downward revisions in earnings estimates for 2017 (21.4%) over the last 30 days. Although the company’s 4Q results surpassed estimates, 2017 guidance fell well short of expectations due to the company’s struggling hepatitis C virus (HCV) franchise.
Gilead’s HCV franchise has been under pressure for quite a while now given the changing market dynamics. While the company’s HIV franchise should do well, factors like patent expiries, competition, and lack of major product launches/near-term pipeline catalysts will remain an overhang on the shares.
Valeant Pharmaceuticals International, Inc. : Valeant, a Zacks Rank #5 (Strong Sell) stock, is one of the companies hit hard by the pricing controversy due to its strategy of acquiring companies and selling their drugs at higher prices. Shares are down 75.4% over the last one year while earnings estimates for 2017 have been revised downwards (7.7%) over the last 30 days.
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Pricing to Remain Pharma Headline Risk in 2017
Drug Pricing Issues to Remain a Headwind
Drug pricing is an issue that has been weighing on pharma and biotech stocks for more than a year now. The sector, which previously had a stellar run, started its downward trend in Sep 2015 when a single tweet by Democratic Presidential candidate Hillary Clinton sent pharma and biotech stocks tumbling. Clinton’s “price gouging tweet" was in response to a huge price hike (about 5,000%) taken by Turing Pharmaceuticals for a drug that was approved by the FDA way back in 1953.
Since then, focus on the drug pricing issue has gone up and companies like Valeant have seen their share prices plunging as they find themselves in the midst of the drug pricing controversy.
Although pharma and biotech shares rallied post-election in November on hopes that drug pricing would not be a key focus area under a Donald Trump presidency, the relief rally turned out to be short-lived following President Trump’s views regarding drug pricing. Trump made it clear that he does not like what happened to drug prices and he will bring down drug prices.
According to the Jan 2017 Kaiser Health Tracking poll, affordability of prescription drugs remains at the top of the public’s priority list for the President and Congress -- focus should be on ensuring the affordability of high-cost drugs to people who need them and taking steps to lower prescription drug prices.
Given the current scenario, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing new treatments to market and the need to invest in R&D to bring additional treatments to market.
Biosimilars Changing the Competitive Scenario
Another challenge being faced by the sector is the recent entry of biosimilar competition in the U.S. While a relatively new area, the market for biosimilars is huge and highly lucrative with several blockbuster biologics including Humira and Lantus slated to lose patent protection by 2020. Biosimilars are expected to reduce healthcare costs and provide a large number of patients with access to much needed biologic treatments.
According to research released by the IMS Institute for Healthcare Informatics last year, increasing acceptance of biosimilars across different therapeutic areas plus an active pipeline of 56 candidates are expected to lead to total savings of about $110 billion to health systems across Europe and the U.S. through 2020.
The report further says that by 2020, biosimilars will start competing with biologics that have annual sales of $50 billion. Several companies are working on bringing biosimilars to market for reference products like Johnson & Johnson’s Remicade, Amgen’s (AMGN - Free Report) Enbrel, Roche/Biogen’s Rituxan and AbbVie’s (ABBV - Free Report) Humira.
Biosimilars are also gaining acceptance across formularies. CVS Health announced that biosimilars and follow-on biologics will be a key part of its 2017 standard formulary strategy, replacing higher cost drugs within the categories. Similar steps have been taken or are being contemplated by other formularies as well.
Although there is still low visibility on how well biosimilars will perform or how much of the market they will be able to capture, the focus on making expensive drugs more affordable and formulary coverage for biosimilars could very well make it challenging for innovator companies to hold on to market share for their blockbuster drugs.
Will New Products Make Up for Lost Sales?
Quite a few of the big players in the drug industry are looking at loss of patent protection for major blockbuster drugs. With generics and biosimilars breathing down their necks, many of these companies are looking towards new products to pick up the pace and make up for lost sales. While several new products were approved last year, many like Orkambi, Repatha and Praluent failed to live up to expectations.
Fewer FDA Approvals in 2016
There was a notable dip in FDA novel drug approvals in 2016 with the agency giving its nod to 22 treatments during the year. Compare this to 45 approvals in 2015 and 41 in 2014 and the 2016 numbers look really disappointing.
It’s not like a fewer number of applications were submitted in 2016 -- as of Dec 9, 2016, 36 new molecular entity (NME) applications were submitted, in line with the average NME filings of 35 over the past decade.
However, a pretty high number of applications got complete response letters (CRLs) from the agency -- a CRL is issued by the FDA to inform the company that its application will not be approved in its present form. There could be several reasons for the same including insufficient data to support approval as well as manufacturing issues.
Some of the drugs that got CRLs in 2016 include Spectrum Pharma’s Qapzola (immediate intravesical instillation post-transurethral resection of bladder tumors in patients with non-muscle invasive bladder cancer), Dynavax’s experimental hepatitis B vaccine Heplisav-B, Advanced Accelerator’s Lutathera (treatment of gastroenteropancreatic neuroendocrine tumors in adults), Sanofi (SNY - Free Report) and Regeneron’s sarilumab (rheumatoid arthritis), and AstraZeneca’s (AZN - Free Report) ZS-9 (hyperkalemia). While both AstraZeneca and Sanofi are Zacks Rank #3 (Hold) stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, although President Trump spoke about speeding up the FDA approval process, his memorandum ordering a freeze on the hiring of Federal employees provides low visibility on how this will impact the FDA. Concerns remain that a hiring freeze at the FDA will negatively affect development programs and the review of new drugs and medical devices.
Stocks to Avoid
As concerns surrounding the drug pricing issue continue to keep the sector volatile, it would be prudent to stay away from stocks that have not been able to win analysts’ confidence and carry an unfavorable Zacks Rank:
Novo Nordisk A/S (NVO - Free Report) : Novo Nordisk, a Zacks Rank #4 (Sell) stock, missed earnings expectations in the fourth quarter of 2016. The insulin segment will remain under pressure due to competition and tough pricing. Earnings estimates for 2017 and 2018 are down over the past 30 days. Novo Nordisk has significantly underperformed the Zacks categorized Large Cap Pharmaceuticalsindustry over the last one year with shares declining 30.8% compared to the industry gain of 9.1%.
Gilead Sciences Inc. (GILD - Free Report) : Gilead, a Zacks Rank #4 stock, is witnessing significant downward revisions in earnings estimates for 2017 (21.4%) over the last 30 days. Although the company’s 4Q results surpassed estimates, 2017 guidance fell well short of expectations due to the company’s struggling hepatitis C virus (HCV) franchise.
Gilead’s HCV franchise has been under pressure for quite a while now given the changing market dynamics. While the company’s HIV franchise should do well, factors like patent expiries, competition, and lack of major product launches/near-term pipeline catalysts will remain an overhang on the shares.
Valeant Pharmaceuticals International, Inc. : Valeant, a Zacks Rank #5 (Strong Sell) stock, is one of the companies hit hard by the pricing controversy due to its strategy of acquiring companies and selling their drugs at higher prices. Shares are down 75.4% over the last one year while earnings estimates for 2017 have been revised downwards (7.7%) over the last 30 days.
To know more about this sector, check out our latest Pharma Industry Outlook.
8 Stocks with Huge Profit Potential
Just released: Driverless Cars: Your Roadmap to Mega-Profits Today. In this latest Special Report, Zacks’ Aggressive Growth Strategist Brian Bolan explores a full-blown technological breakthrough in the making – autonomous cars. He also spotlights 8 stocks with tremendous gain potential to feed off this phenomenon. Click to see the stocks right now >>