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M&A, Innovation & New Drugs to Drive Pharma Stocks

Zacks Equity Research
M&A, Innovation & New Drugs to Drive Pharma Stocks

The pharma and biotech stocks kicked off 2018 on a strong note, carrying on the momentum gained last year. Though the sector has been struggling lately, probably on broader market pressure, it is expected to rebound as the year progresses.

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 Accelerate

Last year was not particularly great as far as M&A deals were concerned. Industry bellwether Johnson & Johnson acquired Actelion for approximately $30 billion, while Gilead acquired Kite for $11.9 billion.

However, this year, expectations of an increase in M&A activity are high. The new tax law, which cuts the corporate tax rate from 35% to 21% and encourages companies to bring back cash held overseas at a one-time tax rate of 10%, is expected to spur merger activity. Sanofi (SNY) and Celgene (CELG) have already announced two deals each so far this year.

Sanofi announced deals to buy Belgian biotech company Ablynx and hemophilia-focused biotech Bioverativ (BIVV). Celgene announced deals to buy Juno Therapeutics, Inc. (JUNO), which focuses on the development of CAR-T therapies, and Impact Biomedicines, which will add a late-stage JAK2 kinase inhibitor, to Celgene’s pipeline.

Merck (MRK) recently announced that it has proposed to buy Australian oncolytic immunotherapies maker Viralytics Ltd. to strengthen its presence in the fast-growing immuno-oncology market.

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) -- Kite and Celgene -- Juno acquisitions and the approval of the two CAR-T therapies in the United States last year – Novartis’ (NVS) Kymriah and Gilead’s Yescarta -- interest in immuno-oncology has picked up significantly.

Innovative Pipelines

Pharma and biotech companies continue to work on bringing innovative treatments to market. 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 key therapeutic areas like immuno-oncology, Alzheimer’s, central nervous system disorders and immunology/inflammation.

Cancer Remains a Key Therapeutic Area

Although several new treatments have emerged in the field of cancer, interest in this area remains high with the disease being 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 CAR-T therapies Kymriah and Yescarta.

The approval of Kymriah and Yescarta 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 acquisition of Kite by Gilead and the potential acquisition of Juno by Celgene have led to renewed interest in this area.

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

Immuno-oncology deals are being inked by companies like Pfizer (PFE), Celgene, Merck KGaA, Bristol-Myers (BMY), AstraZeneca (AZN), AbbVie (ABBV) and Incyte (INCY). 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. 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 have gained approval over the last two years, as well as line and usage extensions, should boost growth. Recent entrants like Novartis’ psoriasis treatment Cosentyx, Merck’s PD-1 inhibitor, Keytruda and Pfizer’s cancer treatment Ibrance have already achieved blockbuster status and are key contributors to the top line. Meanwhile, cancer treatments like Lynparza, Kyprolis, Keytruda, Opdivo and Imbruvica should also bring in more sales thanks to label expansions.

Higher Number of Drugs Approved in 2017

In 2017, the FDA granted approval to 46 novel drugs, more than double of last year’s total tally of 22. Key approvals this year include, Novartis’s Kymriah (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, BioMarin’s Brineura (treatment of a specific form of Batten disease), AbbVie’s Mavyret (HCV) and Gilead’s Yescarta among others. Quite a few of these drugs have blockbuster potential.

Some of the key drugs currently under FDA review with decisions expected in a couple of months include Teva’s fremanezumab (migraine), Amgen’s Aimovig (prevention of migraine), J&J’s apalutamide (pre-metastatic prostate cancer) and AbbVie’s elagolix (endometriosis with associated pain).

Meanwhile, the agency is working on streamlining the development process for drugs for rare diseases as well as targeted cancer therapies. Earlier this month, the FDA proposed new guidelines, which are aimed at lowering the clinical study goals of treatments being developed for neurological disorders such as muscular dystrophies, amyotrophic lateral sclerosis (ALS), Alzheimer’s disease (AD), migraine and epilepsy that aren’t adequately addressed by available 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 Pace

The Internet of Medical Things (IoMT) could well be the future of healthcare 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 collaborating to make devices that can track chronic and lifestyle associated diseases like diabetes, which are becoming rampant.

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.

Companies like Pfizer, AbbVie, Novo Nordisk (NVO), Regeneron Pharmaceuticals, Inc. (REGN), Zoetis, Inc. (ZTS), Bioverativ, Amphastar Pharmaceuticals, Inc. (AMPH), Horizon Pharma Public Ltd. Co. (HZNP), Summit Therapeutics plc (SMMT), Gemphire Therapeutics Inc. (GEMP) etc. are all Buy-ranked stocks. While Regeneron and Bioverativ are Zacks Rank #1 (Strong Buy) stocks, others carry a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Conclusion

All said and done, the pharma sector’s fundamentals remain strong -- robust pipelines, innovative treatments, impressive results, growing demand for drugs (especially for rare 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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