The 2018 JPMorgan Healthcare Conference – the biggest global meeting of pharmaceutical professionals – has kicked off in much the same way as most of the recent conferences have done: with an acquisition. US biotechnology giant Celgene has pledged to pay up to $6.9bn (£5.1bn) for an early-stage drug maker called Impact Bioscience, if its clinical trials are successful.
But aside from this mega-merger – the likes of which market experts are expecting more of, given the recent US tax overhaul – company bosses have used the conference as an opportunity to put out the fires of a terrible 2017. Big pharma took a knock in the final six months of last year after market experts at research giant EvaluatePharma trimmed their five-year forecasts for worldwide drug sales for the first time. The reason for their caution? Political pricing pressure, which is expected to spark a clampdown on the cost of commonly used medicines, and the estimated $194bn-worth of drugs that are due to reach the end of their patent life in the next few years.
British groups Shire (SHP), Vectura (VEC) and GlaxoSmithKline (GSK) were particularly badly affected, their share prices falling 19 per cent, 16 per cent and 24 per cent, respectively, between June and the start of December 2017. Vectura's shares have since recovered. The problem is that these three companies operate in areas of the market that are likely to be hardest hit by a downturn in drugs pricing. GSK and Vectura are specialists in the fiercely competitive respiratory arena, while Shire is a leader in the highly regulated rare diseases space.
But investors needn’t fear – according to company management at least – as each group has a new plan in place to reinvigorate confidence.
Shire used its slot at the conference to inform its investors of the new strategy, which it hopes will sort out its debt issues and lower its exposure to the tricky neuroscience industry. From the first quarter of 2018 onwards, Shire will separate the results of its two new divisions, rare diseases and neuroscience, with a view to potentially spinning neuroscience into an entirely new listed company before the year is up. Rare disease drugs make up 70 per cent of Shire’s sales, which are (potential disposals aside) expected to reach between $17bn and $18bn by 2020. This forecast is down from the previous long-term expectations of $20bn.
Vectura, too, has re-evaluated its strategy after being forced to trim its forecasts. The group suffered disappointment last year when the unbranded version of GSK’s asthma drug Advair – which it has developed alongside Hikma (HIK) – failed to gain approval from US regulators. Swiping generic Advair off the forecasts until at least 2020 prompted analysts at Panmure Gordon to trim their target share price by 10p. However, broker Numis praised management for a “pragmatic approach” to the next chapter in Vectura’s development. The group seems to have learnt from the difficulties in developing a high-profile, risky drug and is instead going to focus on less chancy partnership projects. This means research and development expenditure is due to fall in 2018, while royalty revenues could rise faster than previously expected due to the opportunity to out-license current projects.
The plans at GSK are still up in the air, but chief executive Emma Walmsley did use her slot at JPMorgan to confirm the group’s interest in the consumer healthcare division of US peer Pfizer. Part of the reason for GSK’s dismal performance at the end of 2017 were fears over this major acquisition, which is expected to cost up to $15bn. We agree that it would be concerning if the company deploys a hefty chunk of its thin cash resources into such a low-profit venture, instead of potentially high-margin drug development.
