Big Pharma's Metabolism Is Slowing Down
(Bloomberg Opinion) -- The biggest players in pharma and biotech firms are in a rut, and even a heroic earnings season might not be enough to lift it out.
The broader environment is positive: the Trump administration’s drug-pricing push is for now more sound than fury, the economy is humming, and new treatments are being approved at a rapid clip. And of course there are the benefits still accruing from the recent tax legislation. But pharmaceutical stocks from Bristol-Myers Squibb Co to Novartis AG are lagging behind the market, and a turnaround may not be forthcoming. It’s getting tougher to find blockbusters, which may make it difficult to deliver the returns investors are accustomed to, even if the latest crop of earnings come in strong.
Drugmakers have made amazing advances. New gene and cell therapies may cure rare diseases and certain cancers with a one-time treatment. But even as pharma’s R&D spending rises, it may be getting less productive. A lot of the low-hanging fruit has already been snatched up, leaving drugmakers to chase smaller and more difficult targets.
Among the most lucrative disease areas, cheap generic options and fierce competition have made it increasingly difficult to profit. These factors have been amplified by increasingly consolidated pharmacy benefit managers and insurers, which have gotten more effective at using negotiating leverage to demand large rebates. Big biologic medicines are facing generic competition for the first time, which also threatens the pricing power of newer drugs.
Several attempts to bring new drugs into well-established markets have had disappointing results. Competing cholesterol medicines Repatha and Pralent from Amgen Inc. and Sanofi/Regeneron Pharmaceuticals Inc. are prominent examples. Both are highly effective, but have had difficulty generating significant sales due to payer pushback.
Analysts overestimated those drugs, and have overestimated how a number of other newer medicines would perform in the current environment. The earnings season starting this week will be another test of whether pharma’s anticipated growth-drivers are likely to live up to expectations. Keep an eye on Novartis AG to see how its efforts to find traction with its heart disease Entresto are going, and how Kisqali is doing in a crowded breast-cancer class.
Crowding in new drug classes, including migraine medicines and several areas of cancer treatment, may exacerbate the problem. Nothing reduces a drug’s potential like a price war. Just ask Gilead Pharmaceuticals International Inc., which saw sales of its blockbuster (and curative) Hepatitis C drugs plummet as competitors arrived.
Gilead’s experience also highlights another looming issue.
Curing disease is great for the world, but can create spiky cash flows. Every treated patient shrinks the market. This scenario will only become more common as gene therapies hit the market. An annuity-like payment model rather than a big lump sum could be a solution, but that’s an awkward fit with a U.S. health-care system where people frequently move between insurers.
It’s difficult to prove that pharma’s underperformance comes from a widespread belief that blockbuster drugs will become harder to come by. But it’s telling that AbbVie Inc. and Celgene Corp. — which are particularly reliant on single drugs — have been punished particularly severely by the market after R&D hiccups . Some of that is company-specific, a verdict on management or the size of the hole both have to fill. But it may reflect a broader view of the growing difficulty of buying or developing replacement products.
Those are two extreme examples, but AbbVie and Celgene aren’t the only companies that are too reliant on older medicines or a single newer product. Simply put: it’s getting hard to argue that the sector’s best growth days still lie ahead. Investors may need to reset their expectations accordingly.
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