Emerging markets are slowly and steadily gaining in importance, and several companies are now shifting their focus to these areas. Emerging markets should see strong sales thanks to increased demand for medicines. Several factors like government initiatives for healthcare, new patient population, and increasing use of generics should help drive demand. Growth in emerging markets could help stabilize the base business during the industry's 2010-15 patent cliff.
According to the IMS Institute, spending on medicines in emerging markets will double to $285-$315 billion in the next five years from $151 billion in 2010, driven by strong economic growth coupled with endeavors of concerned governments to expand access to healthcare. This will catapult "pharmerging" markets to the second position by 2015 where spending on medicines is concerned.
Branded Drugs Market Share to Decline
According to the IMS Institute, market share for branded drugs will continue declining over the next five years. Branded drugs market share, which declined from 70% in 2005 to 64% in 2010, is expected to decline to 53% by 2015. The decline will be driven by patent expiries, with generics accounting for a significant part of pharma spending. Spending on branded medicines in 2015 is expected to remain at the same level as in 2010.
OPPORTUNITIES
We currently have a Neutral outlook on large-cap pharma stocks (Zacks #3 Rank). While the companies will continue to face challenges like pricing pressure and genericization, growth in emerging markets and product approvals could help reduce the impact.
According to the IMS Institute, 44 new branded products were launched in 2010. However, the new product approval mix was more towards orphan drugs and medicines with the same mechanism of action as existing therapies.
Important product approvals in 2011 so far include the approval of Johnson & Johnson's prostate cancer therapy, Zytiga, Merck's hepatitis C virus (HCV) treatment, Victrelis, Bristol-Myers Squibb's melanoma treatment, Yervoy, and kidney transplant therapy Nulojix, Vertex Pharma's (NasdaqGS: VRTX - News) HCV treatment, Incivek and AstraZeneca’s (NYSE: AZN - News) blood thinner Brilinta, among others.
We currently have Neutral recommendations on companies like Abbott Labs (NYSE: ABT - News), Johnson & Johnson, Allergan (NYSE: AGN - News) and Pfizer. We believe that Allergan's presence across different segments and geographies will help maintain decent growth going forward.
In spite of the Neutral stance on the stock, we are positive on Bristol-Myers. Earnings estimates have been upped by majority of the analysts covering the stock after its strong second quarter results. 2011 has been a fruitful year for Bristol-Myers so far, with many key drugs getting approved. Growth in the coming quarters is expected to be driven by new product launches and acquisitions and deals.
WEAKNESSES
We recommend avoiding names that offer little growth or opportunity for a take-out. These include companies which are developing drugs that are likely to face regulatory hurdles. The US Food and Drug Administration (FDA) has been exercising more caution in granting approval to new products and several candidates are facing delays in receiving final approval.
We advise investors to avoid names such as Onyx Pharmaceuticals (NasdaqGS: ONXX - News) on which we have an Underperform recommendation. The company delivered lackluster results in the second quarter of 2011 due to lower revenues and higher operating expenses.
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