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Pricing Issues Continue to Weigh on the Pharma Sector
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Sector Remains Volatile on Drug Pricing Issues
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 and Mylan have seen their share prices plunging as they find themselves in the midst of the drug pricing controversy. Moreover, insulin drugmakers like Lilly (LLY - Free Report) and Novo Nordisk (NVO - Free Report) are also under attack with Senator Bernie Sanders posting a series of tweets questioning the prices of their insulin drugs. Lilly is a Zacks Rank #3 stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
And then there is Proposition 61 – California’s ballot measure to ensure that the State of California is able to negotiate with drug companies for drug prices that do not exceed the price paid for the same drugs by the U.S. Department of Veterans Affairs (DVA). Not surprisingly, the drug industry is fighting this proposition.
According to the Oct 2016 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.
In Sep 2016, Democratic Presidential candidate Hillary Clinton announced a health care plan that will address the excessive price hikes of treatments that have been around for years and also reaffirmed her earlier broader plan, announced in Sep 2015, with the aim to lower drug prices for all Americans.
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. With elections round the corner andPresidential candidates, policymakers, the media and the general public focusing on the high price tags for drugs, this issue is not likely to die down easily.
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 new research released by the IMS Institute for Healthcare Informatics earlier this 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 currently have annual sales of $50 billion. About 30 companies are developing biosimilars of 16 molecules – most of the biosimilars in development are for reference products like Johnson & Johnson’s Remicade, Amgen’s (AMGN - Free Report) Enbrel, Roche/Biogen’s Rituxan and AbbVie’s 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.
Vertex (VRTX - Free Report) lowered its 2016 guidance for cystic fibrosis treatment Orkambi in September to reflect slower refills in the U.S. during the summer months of July and August as well as a slower-than-expected launch in Germany.
Meanwhile, PCSK9 inhibitors, Repatha and Praluent, which are expected to bring in blockbuster sales, are yet to see a significant ramp up. Sales of these products are not likely to pick up significantly until the availability of favorable cardiovascular outcomes study data.
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:
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 75.8% so far in 2016 while earnings estimates for both 2016 (down 0.3%) and 2017 (down 0.8%) have been revised downwards over the last 30 days.
Mylan N.V. : Mylan is another company that finds itself mired deep in the drug pricing controversy given the price hikes taken for its life-saving combination product EpiPen. This Zacks Rank #4 (Sell) stock has seen its share price declining 30.3% so far in 2016. While earnings estimates for 2016 are down 2.6% over the last 30 days, 2017 estimates are down 2.3%.
Gilead Sciences Inc. (GILD - Free Report) : Gilead, a Zacks Rank #5 stock, missed earnings estimates in the recently reported third quarter with the company’s hepatitis C virus (HCV) franchise remaining under pressure. Shares are down 24.4% so far in 2016. Estimates for 2016 are down 0.4% over the past 30 days while 2017 estimates are down 1.8%.
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Pricing Issues Continue to Weigh on the Pharma Sector
Sector Remains Volatile on Drug Pricing Issues
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 and Mylan have seen their share prices plunging as they find themselves in the midst of the drug pricing controversy. Moreover, insulin drugmakers like Lilly (LLY - Free Report) and Novo Nordisk (NVO - Free Report) are also under attack with Senator Bernie Sanders posting a series of tweets questioning the prices of their insulin drugs. Lilly is a Zacks Rank #3 stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
And then there is Proposition 61 – California’s ballot measure to ensure that the State of California is able to negotiate with drug companies for drug prices that do not exceed the price paid for the same drugs by the U.S. Department of Veterans Affairs (DVA). Not surprisingly, the drug industry is fighting this proposition.
According to the Oct 2016 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.
In Sep 2016, Democratic Presidential candidate Hillary Clinton announced a health care plan that will address the excessive price hikes of treatments that have been around for years and also reaffirmed her earlier broader plan, announced in Sep 2015, with the aim to lower drug prices for all Americans.
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. With elections round the corner andPresidential candidates, policymakers, the media and the general public focusing on the high price tags for drugs, this issue is not likely to die down easily.
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 new research released by the IMS Institute for Healthcare Informatics earlier this 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 currently have annual sales of $50 billion. About 30 companies are developing biosimilars of 16 molecules – most of the biosimilars in development are for reference products like Johnson & Johnson’s Remicade, Amgen’s (AMGN - Free Report) Enbrel, Roche/Biogen’s Rituxan and AbbVie’s 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.
Vertex (VRTX - Free Report) lowered its 2016 guidance for cystic fibrosis treatment Orkambi in September to reflect slower refills in the U.S. during the summer months of July and August as well as a slower-than-expected launch in Germany.
Meanwhile, PCSK9 inhibitors, Repatha and Praluent, which are expected to bring in blockbuster sales, are yet to see a significant ramp up. Sales of these products are not likely to pick up significantly until the availability of favorable cardiovascular outcomes study data.
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:
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 75.8% so far in 2016 while earnings estimates for both 2016 (down 0.3%) and 2017 (down 0.8%) have been revised downwards over the last 30 days.
Mylan N.V. : Mylan is another company that finds itself mired deep in the drug pricing controversy given the price hikes taken for its life-saving combination product EpiPen. This Zacks Rank #4 (Sell) stock has seen its share price declining 30.3% so far in 2016. While earnings estimates for 2016 are down 2.6% over the last 30 days, 2017 estimates are down 2.3%.
Gilead Sciences Inc. (GILD - Free Report) : Gilead, a Zacks Rank #5 stock, missed earnings estimates in the recently reported third quarter with the company’s hepatitis C virus (HCV) franchise remaining under pressure. Shares are down 24.4% so far in 2016. Estimates for 2016 are down 0.4% over the past 30 days while 2017 estimates are down 1.8%.
To know more about this sector, check out our latest Pharma Industry Outlook.
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Beyond this Industry Outlook, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>