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FTSE 350: Big pharma braced for a rocky year

Pressure on US drug prices continues to cloud the outlook for the world’s biggest pharmaceutical and biotech companies
January 25, 2018

Last year began with a great deal of hope for the global pharmaceutical and biotech industry, which rapidly descended into despair. A plethora of high-profile clinical trial failures – AstraZeneca’s (AZN) long-awaited cancer drug, Eli Lilly’s groundbreaking Alzheimer’s treatment and Roche’s new haemophilia cure, to name a few – were compounded by political pressure on amending drugs prices. In January, US President Donald Trump proclaimed pharma companies were “getting away with murder”. In June, things became much worse when Evaluate Pharma trimmed its guidance for drugs sales growth for the first time ever. Revenues are now expected to reach $1.06 trillion (£0.86 trillion) by 2020, $0.16 trillion below previous forecasts. It’s hardly surprising, therefore, that expectations for the pharma and biotech market in 2018 is gloomy at best.

Shire (SHP) and Vectura (VEC), two of the UK’s worst-performing pharma stocks of 2017, have new strategies in place to cope with the challenges. Vectura – which struggled after disappointing results from one of its asthma drugs – is set to outsource more of its medicine development process, rather than take the high-risk route of engineering all its medicines from start to finish alone. Shire – which has a major debt pile that needs sorting – is due to separate its two divisions with a view to potentially spinning out neuroscience before the year is up.

Shire isn’t the only pharma company distancing itself from neuroscience – US group Pfizer (US:PFE) recently walked away from all its Alzheimer’s and Parkinson’s Disease assets. And yet, scientifically, neuroscience has provided medicine with one of its biggest breakthroughs of recent years. In December, researchers at University College London became the first to correct the genetic defect that causes Huntingdon’s Disease. In 2018, pharma companies that still have an arm in neuroscience will compete to become the first to turn this enormous scientific breakthrough into a commercially viable treatment.

The UK’s biggest pharma company, GlaxoSmithKline (GSK), is suffering from a bit of an identity crisis. The group’s new chief executive, Emma Walmsley, pleasantly surprised investors by promising to increase focus on the group’s prescription drugs division at the start of last year. But, more recently, she seems to be favouring less profitable over-the-counter medicines and has confirmed the company’s interest in acquiring the consumer health division of Pfizer. But this potential deal is worrying for investors as market experts think Pfizer’s assets could total $15bn. That’s money GSK doesn’t have to spend while it’s still paying a generous dividend.

By contrast, AstraZeneca is unwavering on its strategy: launch a new, game-changing drug and increase earnings again. The group has invested heavily in research and development in the past few years and its development pipeline is starting to bear fruit. However, the market Astra really wants to crack is immuno-oncology – using the body’s own immune system to treat cancer. In the first half of 2018 the company will reveal the efficacy of the world’s first immuno-oncology combination therapy in prolonging the life of cancer patients. But hopes aren’t too high: the same type of therapy failed to delay the progression of cancer in a trial that concluded last year. Even so, Astra has flagged another eight potential ‘blockbuster’ drugs due to complete clinical trials within the next 12 months.

Once again, the price of new drugs is likely to be a major theme in the pharma and biotech markets this year. Patient groups have kept up a relentless campaign to drive down the price of these medicines and politicians on both sides agree with them. But it seems those in charge of pricing at the world’s biggest drugs companies have paid no attention to the pleas of US citizens. Regulators recently gave the thumbs up to the most expensive drug ever – a potential cure for blindness worth $425,000 an eye.

Generic drug makers – which includes UK-listed Hikma (HIK) – are likely to continue to bear the brunt of any real attempt by regulators to drive down prices. The Food and Drug Administration (FDA) has been handing out new generic approvals at a record pace to increase competition and lower prices. To make matters worse, increasingly ambitious family-owned drug-makers in India have stepped up manufacturing, which has undercut prices even further. 

 

CompanyPrice (p)Market value (£m)PE RatioYield (%)1-year change (%)Last IC view
Astrazeneca4,99163,19118.04.410.2Buy, 5,055p, 09 Nov 2017
BTG7502,89832.50.027.0Buy, 699p, 14 Nov 2017
Dechra Pharmaceuticals1,9951,86546.41.140.3Buy, 1,970p, 04 Sep 2017
Genus2,5401,56333.00.946.2Buy, 2,413p, 09 Nov 2017
Glaxosmithkline1,35967,38813.35.9-12.4Sell, 1,380p, 27 Oct 2017
Hikma Pharmaceuticals1,0232,46111.52.6-46.6Sell, 995p, 09 Nov 2017
Indivior4032,90936.70.032.5Hold, 406p, 01 Nov 2017
Shire3,50031,84219.20.7-22.5Buy, 3,996p, 27 Dec 2017
Vectura Group11779220.90.0-15.9Hold, 90p, 08 Sep 2017