Profit from big pharma's new lease of life
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Associate Editor
David Stevenson Dec 18, 2009
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Few people – or businesses – were buoyed up by last week's Pre-Budget Report (PBR). But bosses in one sector had big smiles on their faces. The Chancellor's decision to slash corporation tax on income derived from patents to just 10% was great news for Britain's big pharma firms. But while the tax break is good news, it's far from being the only reason to buy big pharma for 2010.
Big drug-makers have fallen out of favour with investors over the past decade. Small wonder. The $780bn global market for prescription drugs is now growing at just 5% a year. And patent expiries have been high on the worry list. By mid-2009, says Moody's, scheduled patent expiries for big pharma were running at 25% of drug portfolios, from 17% at the end of 2007. A full $135bn in prescription drug sales will lose patent protection in the next five years, says Alan Sheppard of research group IMS Health.
And as we said a fortnight ago, drug firms are tiring of trying to produce blockbusters. It can take ten years to get a new drug to market. Then within a few years, sales and profits are savaged when cheap generic clones are launched as patents expire. So both research spending and new product applications have fallen. Product liability litigation has also been costly.
Wyeth, now owned by US pharma giant Pfizer, has had to set aside some $21bn to resolve product liability claims for diet drug Fen-Phen. Merck will pay $4.85bn in claims over its withdrawn painkiller Vioxx. GlaxoSmithKline has paid almost $1bn to resolve lawsuits over its antidepressant Paxil since the latter's introduction in 1993.
But Glaxo, Europe's biggest drug-maker, is now feeling much better. Following the PBR tax break, Glaxo now plans to spend £500m on building a new British biotech drugs factory and expanding an existing plant to make next-generation respiratory medicines. But more important for the sector as a whole is a revival of interest in vaccines. The success of Wyeth's pediatric pneumococcal vaccine Prevnar, which now generates over $3bn in annual sales, has proved that vaccines can make money. That's good news. These biological drugs are expensive and hard to produce, but this makes them less vulnerable to generic competition.
With analysts forecasting annual growth of 13% until at least 2012, right now the vaccine business looks the best place to be in the sector. Cash-rich drug firms clearly agree – they've been snapping up vaccine-makers. "Witness the slew of recent deal-making centered on vaccines," says Kerry Capell in BusinessWeek. Pfizer is now in this business via its $68bn Wyeth acquisition. Abbott Laboratories has spent $6.6bn on Belgian flu vaccine maker Solvay. And Johnson & Johnson has bought 18% of Dutch vaccine firm Crucell. "More companies are investing in vaccines as a way of diversifying away from prescription drugs," says Michael Boyd of the International Federation of Pharmaceutical Manufacturers & Associations. "New technologies, such as cell culture, are enabling them to produce more sophisticated vaccines."
This also means that big pharma is set to cash in further on swine flu, where there's still a serious vaccine shortage. As emerging economies mature and lift their healthcare spending, they're providing vaccine drug-makers with more attractive new markets. Glaxo and Sanofi, with their recent deals in Brazil, China and India, have led the way here. Below we look at another pharma giant set to prosper.
The best bet in the sector
One of the big drugs group stocks best placed to cash in on the vaccine renaissance is Swiss giant Novartis (VX: NOVN). It's just opened its first American large-scale cell culture plant, "a major milestone in using biotech production technologies to replace the 50-year-old manufacturing process based on growing vaccines in eggs", says Kerry Capell in BusinessWeek. This plant will be able to produce 150 million doses of swine flu (H1N1) vaccine within six months of a pandemic starting. Last month, it also spent $125m on an 85% stake in privately-owned Chinese vaccines group Zhejiang Tianyuan.
Novartis expects to generate $700m in fourth-quarter sales alone from its H1N1 vaccine. While the flu vaccine business is seasonal and unpredictable, areas such as meningitis offer greater longer-term opportunities. Analysts say Novartis's two meningitis vaccines have multi-billion dollar revenue potential.
These medicines have already rung up 2009 sales of $1.5bn, while the firm has been raising its investment in vaccine research and development, clinical trials and manufacturing facilities. On a current year p/e of 13, falling to 11.5 next year (based on City forecasts of double-digit earnings growth), the shares look great value at SF56. This year's yield is 3.8%, and is forecast to climb to 4.2% in 2010.
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