Big pharma stymied by slump in non-Covid-19 treatments

Covid-19 is having both direct and indirect impacts for the healthcare industry at large, a point borne out by contrasting quarterly trading updates for GlaxoSmithKline (GSK) and AstraZeneca (AZN).

Though both pharma groups are involved in advanced vaccine programmes aimed at stalling the spread of the virus itself, overall sales growth for GSK has been constricted by widespread disruption to vaccination programmes for non-Covid-19 ailments. A preoccupation with the coronavirus has resulted in a "catastrophic" drop in diagnoses, surgeries and appointments, according to the British Medical Association, which has had evident negative implications for pharmaceutical producers.

So, although revenue for GSK’s respiratory products increased by 26 per cent at constant currencies, sales for its blockbuster shingles vaccine Shingrix were down a quarter over the third quarter (Q3). Management had cause for optimism as prescriptions had returned to pre-pandemic levels by the end of the quarter, with adult immunisation rates in the US staging a comeback. But a long winter of lockdowns could stunt the recovery. Investors also need to be mindful of the potential structural changes in clinical practice that could follow in the wake of the pandemic. For example, it is quite conceivable that the explosion in virtual healthcare, and the move away from in-person appointments, could weigh on prescription volumes over the long run.

Income seekers may be drawn to GSK simply for a forward yield of around 5 per cent, although given its financing commitments and an average five-year cover ratio of 1.1, it would be unwise to assume that the existing 80p annual payout will remain inviolate going forward.

For now, the group trades at a discount to the sector, which may be linked to a lower mid-term growth outlook. With existing drug patents withering, much depends on the clinical success of the 50 or so medicines and vaccines in development, although hopes are high that the consumer healthcare joint venture with US drug heavyweight Pfizer (US:PFE) will do much to provide financial headroom in the lengthy space between clinical drug development, approval and commercialisation.

The ill effects of national lockdowns and patients’ reluctance to visit healthcare facilities are also reflected in a Q3 update for AstraZeneca, though certainly not to the same extent.

While AstraZeneca revealed slowing drug sales through Q3, underlying earnings are up 16 per cent in the year to date, largely a consequence of the successful commercial roll-out of a new generation of oncology therapies. Indeed, the company's trading update was accompanied by news of two new approvals by the EU for the group’s Lynparza cancer treatment. And the group’s collaboration with Japanese oncology specialist Daiichi Sankyo could serve to significantly boost earnings sooner than anticipated, as the bid to jointly develop and commercialise the oncology treatment Enhertu has gained traction following positive trial results and clinical approval in the US and Europe for the treatment of certain breast cancers.

The group is launching Phase III trials for its Covid-19 treatment in development with the University of Oxford, and management is hopeful of a positive outcome by the end of 2020, by which time it intends to co-ordinate the delivery of vials with the timing of the clinical trial readout. AstraZeneca does not intend to profit while Covid-19 is still classified as a pandemic, and the level of profitability generated by the jointly developed vaccine once the jab becomes part of the regular vaccination regime is open to conjecture, but at the very least the programme promises to add significant capabilities in a specific area beyond the group’s existing core competencies, such as oncology and diabetes therapies.

The University of Oxford tie-up may have generated column inches, but AstraZeneca’s determination to broaden and deepen its footprint in emerging market economies is where the real value lies, with regional sales up by 11 per cent to $6.47bn (£4.92bn) in the year to date. The group is also reaping the rewards of its new medicines portfolio, which recorded a 36 per cent increase in sales to $9.89bn, a significant proportion of which was again derived from increased penetration within overseas growth markets. That's a stark contrast to GSK whose lack of innovation in the past decade is having a profound negative impact on growth. The company is playing catch-up and increased its R&D expenditure to 13 per cent of group sales in the third quarter, but this still trails Astra by a considerable amount – the company increased its R&D expenditure to 23 per cent of group sales in the third quarter.

Leaving aside the performance of the two UK pharma titans, what industry trends are likely to hold fast post-pandemic? We have already noted the shift towards virtual healthcare practices, but the DARU Journal of Pharmaceutical Sciences suggests that clinical R&D focus could alter permanently once the virus runs its course. Certainly, you imagine AstraZeneca would want to eventually see a return on its weighty capital outlay in the vaccines space. The journal also envisages that the industry will be faced by a growth slowdown, approval delays and the necessity to adapt to a move towards self-sufficiency in pharma-production supply chains.