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While the drug pricing issue is no longer a major headwind for pharma and biotech stocks, it will nevertheless remain a headline risk until the Trump administration comes out with a policy for controlling drug prices. The sector, previously a Wall Street favorite, was hit hard by political rhetoric and increasing media and public focus on the high prices of drugs. With the drug pricing controversy gaining steam since September 2015, companies like Valeant saw their share prices plunge.

According to the April 2017 Kaiser Health Tracking poll, six in 10 Americans believe that affordability of prescription drugs should be the top priority for the President and Congress. The focus should be on ensuring the affordability of high-cost drugs to people who need them and taking steps to lower prescription drug prices.

Some of the options favored by the public for drug price control include getting drug companies to reduce prices of medication for people on Medicare, making it easier for generics to enter the market, and requiring drug companies to provide information on how drug prices are set.

Although pharma and biotech sectors rebounded in 2017 and started 2018 on an optimistic note, drug companies may find it a bit difficult to justify their high prices by citing the years and funds that go into bringing treatments to market and the need to invest in R&D to develop additional treatments.

Biosimilars a Key Headwind

Another challenge being faced by the sector is the recent entry of biosimilar competition in the United States. While a relatively new area, the market for biosimilars is huge and highly lucrative, with several blockbuster biologics 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 United States through 2020. The report further says that by 2020, biosimilars will start competing with biologics that have annual sales of $50 billion.

Biosimilars are also gaining acceptance across formularies. 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.

Generics Pose a Threat

Quite a few of the big players in the drug industry are looking at loss of patent protection for major blockbuster drugs. Pfizer’s (PFE - Free Report) Pristiq and Viagra, Merck’s (MRK - Free Report) Vytorin, Sanofi’s (SNY - Free Report) Renagel, Lilly’s Strattera, Axiron and Effient are some key drugs, which started to face generic competition in the United States in 2017. The launch of a generic version of Teva’s 40 mg formulation of blockbuster multiple sclerosis drug, Copaxone in October last year significantly hit the company’s sales and profits. Some other key drugs expected to face generic/biosimilar competition in 2018 include Glaxo’s (GSK - Free Report) Advair, Amgen’s (AMGN - Free Report) Neulasta, Epogen and Sensipar, Lilly’s (LLY - Free Report) Cialis, Allergan’s (AGN - Free Report) Namenda XR and Restasis, among others.

With generics and biosimilars breathing down their necks, many of these companies are looking toward new products to pick up pace and make up for lost sales. However, relatively newer products like Amgen’s Repatha and Sanofi/Regeneron’s Praluent have yet to ramp up significantly. With efforts on to control drug prices, the FDA is focusing on speeding up the generic drug approval process, especially for third, fourth or fifth generics, which is leading to rapid erosion of branded drug sales.

Slowdown in Sales of Mature Products

Several companies like Amgen are facing a slowdown in sales of mature products while new product sales have yet to pick up significantly. Many of these companies are also facing loss of patent protection, which means generics or biosimilars, as the case may be, could enter the market soon and lead to price erosion.

Pricing Pressure to Hit Sales

While concerns regarding the drug pricing issue may have taken a backseat for the time-being, pharma and biotech companies remain wary of increasing scrutiny of drug prices. Moreover, with increasing competition in the market and the entry of innovative treatments, pricing pressure is expected to hit sales.

Regulatory Setbacks

Although the FDA surpassed 2016’s tally of new drug approvals in 2017, a few companies failed to gain approval for their drugs last year and were issued complete response letters (CRLs) by 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 companies that are facing a delay in getting their drugs approved include Mylan (biosimilar version of Amgen’s Neulasta), Lilly (Olumiant for rheumatoid arthritis), Amgen and UCB (Evenity for the treatment of postmenopausal women with osteoporosis).

UCB SA (UCBJF - Free Report) is a Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Avoid

As concerns regarding pricing pressure, slowdown in legacy product sales and biosimilar competition 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.

Companies like AstraZeneca (AZN - Free Report) , Bayer (BAYRY - Free Report) Dr. Reddy's Laboratories Ltd. (RDY - Free Report) , Teva Pharmaceuticals (TEVA - Free Report) and Adamas Pharmaceuticals, Inc. ADMS are all Sell-ranked stocks. While AstraZeneca, Bayer and Adamas Pharmaceuticals are Zacks Rank #4 (Sell) stocks, Teva and Dr. Reddy's carry a Zacks Rank #5 (Strong Sell). To know more about this sector, check out our latest Pharma Industry Outlook.

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