Image Source: Images Money
By Kris Rosemann
There’s no shortage of excitement in the pharmaceutical (XLV, IBB) sector as of late.
It’s almost on a weekly basis that we hear of some pharma giant involved in a merger, attempted acquisition, or buyout rumor, but it makes sense that ongoing consolidation will be an theme across the group, particularly when considering the outlook for top-line growth across the biotech/pharma space, which remains weighed down by pricing pressures. More recently, for example, diabetes giant Novo Nordisk (NVO) noted that it expects average drug prices in 2017 to be down in the low- to mid-single digit range from 2016 levels after the completion of the majority of its negotiations with pharmacy benefits managers for the year. Growing regulatory scrutiny (particularly on drug prices), shorter product lifecycles, and the growing power of buyers have all resulted in an increase in pressure for management teams to find new sources of revenue expansion, and that means deal-making to pad the pipeline.
The most recent example of M&A activity, or talk of M&A activity, came August 2 as rumors swirled that Allergan (AGN) and/or Merck (MRK) had interest in acquiring Biogen (BIIB). The speculation was later shot down, but the transaction which would have been a blockbuster one in light of Biogen’s lofty market capitalization. This news came shortly after Teva Pharmaceuticals (TEVA) was finally able to appease regulators and close its ~$40 billion purchase of Allergan’s generics portfolio. You may also remember that Allegan had agreed to have the remainder of its business acquired by Pfizer (PFE) for a whopping $160 billion before a US tax rule change increased the scrutiny on tax-inversion deals such as the proposed Allergan-Pfizer tie up. Abbott (ABT) is also looking to grow via acquisition, though it is not targeting a rival pharma company or fast-growing specialty therapy firm; it has agreed to acquire medical device leader St. Jude Medical (STJ) in an attempt to bolster its position in what looks to be an attactive long-term opportunity in the heart devices market.
On a smaller scale, Medivation (MDVN) has asked for indications of interest from suitors by mid-August with potential interest coming from Pfizer, Sanofi (SNY), Gilead Sciences (GILD), and Celgene (CELG). Medivation is not the only cancer therapy firm that has been an object of desire for large cap drug providers, who continue to look for ways to bolster growth prospects via new treatments; a stong oncology pipeline/portfolio has been a hot commodity as of late. A recent example of this is AbbVie’s (ABBV) $5.8+ billion acquisition of Stemcentrx, a firm specializing in oncology therapy. AstraZeneca (AZN) has also been rumored to have caught the eye of Novartis (NVS) of late. The excitement surrounding cancer therapies cuts both ways, as Bristol-Myers Squibb (BMY) investors encountered after its drug Opdivo failed to meet its primary endpoint in a recent Phase 3 trial. Let’s take a look at the most recent quarterly results of some of the bigger players in the industry.
Abbott Looking to St. Jude to Accelerate Growth
Abbott’s second quarter report, released July 20, reflected an acceleration in sales growth from the first quarter of the year, but its year-over-year net sales growth of 3.2% was indicative of why the firm is searching for top-line expansion outside of its current product portfolio. Key drivers of growth in the quarter were its ‘Medival Devices’ segment (6.4% sales growth) and its ‘Diagnostics’ segment (4.4% sales growth), while its ‘Established Pharmaceuticals’ segment’s solid sales growth on an operational basis was punished by currency headwinds. Though diluted earnings per share fell more than 21% from the second quarter of 2015 on a GAAP basis, when excluding specified items, diluted earnings per share grew nearly 6%. Management reiterated its full-year adjusted earnings per share for continuing operations of a range of $2.14-$2.24.
While the acquisition of St. Jude Medical will likely dominate the growth discussion for Abbott for the time being, the firm experienced some solid momentum in its treatment portfolio in the second quarter of 2016. Abbott received US FDA approval for Absorb, the only fully dissolving heart stent, and Tecnis Symfony intraocualr lenses for the treatment of cataracts in the quarter. The company also announced the global launch of AlinIQ, a first-of-its-kind informatics solutions to help diagnostics labs increase productivity and flexibility in managing data, a product that we believe speaks to the diversity of its portfolio. Of course, all of these updates come in addition to the coming purchase of St. Jude’s entire portfolio, which includes a competitive pipeline of cardiovascular, neuromodulation, diabetes, and vision care products. We currently value shares at $43 apiece.
Biogen’s Strong Pipeline Attracting Attention
Biogen reported a strong second quarter of 2016 July 21 as revenue grew 12% from the year-ago period thanks to worldwide advances in its multiple sclerosis and hemophilia businesses. The core driver of its multiple sclerosis was Tecfidera, which increased revenue 12% in the quarter, while the highlight of its hemophilia portfolio was the relatively young drug Eloctate, which grew revenue an impressive 68%. Non-GAAP diluted earnings per share jumped 23% to $5.21 on a year-over-year basis as “thoughtful management of expenses” helped drive the increase in profitability. The firm’s strong quarter led management to increase its full-year guidance. Revenue is now expected to be approximately $11.2-$11.4 billion while non-GAAP diluted earnings per share are anticipated to be in a range of $19.70-$20.00, compared to previous guidance of $11.1-$11.3 billion and $18.30-$18.60, respectively.
Part of what has made Biogen an attractive takeout candidate is its budding pipeline of treatments, and along with its top and bottom-line guidance increases in, it increased its expected research and development spending as a percentage of revenue for the full-year as well. The firm is currently working to enroll two Phase 3 clinical trials for its developing treatment for early Alzheimer’s, and its collaboration partner Ionis Pharmaceutical