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Innovative Pipelines & Regulatory Catalysts to Drive Pharma Stocks

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Although pharma and biotech stocks had gone through a rough patch due to the drug pricing controversy, the sector is showing signs of recovery, with investors being more comfortable with the drug pricing scenario and focusing on the fundamentals of the sector instead. Innovation, mergers and acquisitions (M&As), strong results, product approvals and positive data flow should act as catalysts for pharma and biotech stocks.

M&As to Increase Activity

While 2017 has not exactly been a great year so far where M&A deals are concerned, expectations are high that the sector will witness an increase in M&As in the coming quarters. Tax reform and cash repatriation are expected to lead to a boost in this area.

Big players like Sanofi have expressed an interest in pursuing M&A deals. Allergan has also been very active on the acquisition and deal-making front. Industry bellwether Johnson & Johnson acquired Actelion for approximately $30 billion this year, while Gilead acquired Kite for $11.9 billion. While some of these companies are looking to replace sales of blockbuster products that are facing loss of patent exclusivity, others are looking to build their pipelines both through acquisitions as well as licensing agreements.

Companies with innovative technologies and pipelines are highly sought after. Niche disease areas like nonalcoholic steatohepatitis (NASH), immuno-oncology and multiple sclerosis are in demand. Treatments for orphan diseases are also much sought-after, with quite a few deals being signed in these areas. With the Gilead (GILD - Free Report) - Kite acquisition announcement and the approval of the first CAR-T therapy in the United States, interest in immuno-oncology has picked up significantly.

Innovative Pipelines

Pharma and biotech companies continue to work on bringing innovative new treatments to market and there could be significant catalysts in the coming quarters in the form of important new product approvals as well as major data read-outs especially in important therapeutic areas like immuno-oncology, Alzheimer’s, central nervous system disorders and immunology/inflammation.

Cancer Remains Key Therapeutic Area

Although several new treatments have emerged in the field of cancer, interest in this area remains high with the disease remaining one of the leading causes of morbidity and mortality across the world. Even though a lot of progress has been made in this area, companies are aiming to bring out newer and better treatments. Focus in this area has increased with the recent FDA approval of the first CAR-T therapy, Novartis’ NVS Kymriah.

Kymriah’s approval marks the beginning of a new era in the treatment of cancer. The path-breaking immunocellular therapy is a one-time treatment that uses a patient's own T-cells to fight cancer. The recently completed $11.9 billion acquisition of Kite by Gilead has also renewed interest in this area – the acquisition places Gilead among the top players in the emerging field of cell therapy. Kite’s expertise lies in developing engineered cell therapies that express either a chimeric antigen receptor ("CAR") or an engineered T-cell receptor ("TCR"), depending on the type of cancer.

Major players in this field include Bristol-Myers, Novartis, AstraZeneca, Merck and Roche.

Deals targeting immuno-oncology are being inked by companies like Pfizer PFE, Celgene, Merck KGaA, Bristol-Myers, AstraZeneca and Incyte. Interest in PARP inhibitors has also increased considerably as they could well be the next major class of therapeutics in oncology.

According to IMSQuintiles, 68 new cancer drugs were approved for 22 indications from 2011 to 2016, while worldwide costs for cancer therapeutics and supportive care drugs shot up from $91 billion in 2012 to $113 billion in 2016 with the United States accounting for 46% of the costs. More than 600 molecules are in late stage development, with the majority being targeted therapy.

New Product Sales Should Ramp Up

Sales of products that gained approval over the last two years, as well as line and usage extensions, should ramp up and boost growth. Recent entrants like Novartis’ psoriasis treatment Cosentyx and Pfizer’s cancer treatment Ibrance have already achieved blockbuster status and are key contributors to the top line. Meanwhile, cancer treatments like Kyprolis, Keytruda and Imbruvica should also bring in more sales thanks to label expansions.

Higher Number of Drugs Approved So Far in 2017

At a meeting with pharma majors earlier this year, President Trump spoke about speeding up the FDA approval process. Last year, the number of new drug approvals slipped to 22, well below the 45 approvals in 2015 and 41 in 2014. The President said that the FDA will be streamlined and the drug approval process will be much faster. The 21st Century Cures Act is a step in this direction.

With the passing of this Act, expectations are that there will be more innovation in the sector and, maybe, a surge in new drug approvals.

So far in 2017, the FDA has granted approval to 34 novel drugs, surpassing last year’s total tally of 22. Key approvals this year include Novartis’sKymriah (the first gene therapy in the United States), Lilly’s Verzenio (advanced or metastatic breast cancer), Gilead’s Vosevi (hepatitis C virus), Puma’s Nerlynx (to reduce the risk of breast cancer returning), J&J’s Tremfya (moderate-to-severe plaque psoriasis), Regeneron/Sanofi’s Kevzara (rheumatoid arthritis), Roche’s multiple sclerosis treatment, Ocrevus, Regeneron and Sanofi’s eczema treatment, Dupixent, TESARO’s PARP inhibitor, Zejula and BioMarin’s Brineura (treatment of a specific form of Batten disease) among others. Quite a few of these drugs have blockbuster potential.

Some of the key drugs currently under FDA review with decisions expected by year end include Gilead’s axicabtagene ciloleucel (cancer) and Alexion’s Soliris (label expansion into refractory generalized myasthenia gravis (gMG) among others.

Meanwhile, the agency is working on streamlining the development process for drugs for rare diseases as well as targeted cancer therapies. The FDA is also working on clearing up a backlog of orphan drug applications.

According to the IMSQuintiles report, the late-phase R&D pipeline for the industry indicates that there should be about 40-45 new brand launches every year through 2021.

Tech Tie-Ups to Pick Up the Pace

The Internet of Medical Things (IoMT) could well be the future of healthcare with this segment of the market fast gaining pace as pharma companies look to innovate and keep up with technology to help patients and physicians better monitor and track diseases.

IoMT involves the bringing together of technology and medical devices and applications. Chronic diseases which require frequent monitoring can be tracked effectively so that patients receive timely and proper treatment. Wearable devices like Apple Watch, Fitbit and Samsung S Health help users achieve their fitness and health targets.

Pharma and tech companies are now taking things a step further and are collaborating to make devices that can track chronic and lifestyle associated diseases like diabetes which are growing at a fast pace.

In fact, the scope for innovation in this area -- contact lenses that can detect glucose levels, devices that monitor caloric intake, bioelectronic medicines that may treat a wide range of chronic diseases, robotic-assisted surgery – is seemingly endless.

Stock Picks

Although the sector may face some volatility due to the drug pricing issue, pipeline success in innovative and important therapeutic areas, cost-cutting, share buybacks, new products, increased pipeline visibility and appropriate utilization of cash should help maintain investor confidence in this sector.

Here are a few stocks that look well-positioned and carry a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Novo Nordisk NVO: Novo Nordisk, a key player in the diabetes market, has gained 32.6% so far this year. The Zacks Consensus Estimate for the current year has been revised 0.4% upward over the last 60 days. Moreover, the Zacks Rank #2 stock surpassed earnings estimates by an average 3.6% over the trailing four quarters.

Vertex Pharmaceuticals VRTX: Vertex is a key player in the cystic fibrosis (CF) market. The company holds a strong position in this market with two marketed products – Orkambi and Kalydeco. Vertex is working on expanding its CF portfolio and is currently seeking both FDA and EMA approval for a tezacaftor/ivacaftor combination. With the FDA granting priority review, a response should be out by Feb 28, 2018.

Vertex, a Zacks Rank #1 stock, has gained 107.6% year to date. The Zacks Consensus Estimate for the current year has been revised 0.6% upward over the last 60 days. Moreover, the stock surpassed earnings estimates by an average 17.9% over the trailing four quarters.

Celgene Corp. CELG: Celgene is focused on the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases. The company has several blockbuster products in its portfolio including Revlimid, Pomalyst and Otezla. Celgene has a rich and promising pipeline as well, with key data readouts lined up for the next two years.

Celgene, a Zacks Rank #2 stock, has gained 17.9% year to date. The stock surpassed earnings estimates by an average 3.8% over the trailing four quarters.

Ligand Pharmaceuticals Inc. LGND: Ligand’s business model is based on developing or acquiring royalty revenue generating assets and coupling them with a lean corporate cost structure. The Zacks Rank #1 stock is focused on the development and licensing of biopharmaceutical assets. Ligand’s Captisol formulation technology has allowed it to enter into several licensing deals and generate royalties. The company’s partners include big names like Amgen and Novartis among others. Ligand also has licensing deals based on its OmniAb technology.

Ligand’s recent decision to acquire Crystal Bioscience, a leader in avian genetics and the generation of fully-human therapeutic antibodies, is expected to boost the company’s 2018 revenues by at least $5 million, and earnings by at least 9 cents per share.

Ligand has gained 40.8% so far in 2017 and has surpassed earnings estimates by an average 6.2% over the trailing four quarters.

All said and done, the pharma sector’s fundamentals remain strong -- robust pipelines, innovative treatments, impressive results, growing demand for drugs especially for rare-to-treat diseases, an aging population and increased health care spending should support growth. To know more about this sector, check out our latest Pharma Industry Outlook.

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