Pharma is well-known as an extremely high margin business, capable of generating substantial incremental shareholder value due to its capacity to leverage the economics of patents and its relatively low incremental investment rates. Indeed, the profitability of Pharma has made it a political target for decades. In the current environment, however, Pharma is proving to be a critical commercial pillar for bankrolling the research into COVID-19, with companies like Gilead (GILD) attempting to bring remdesivir to bear against the crisis. We are not interested in speculating on who will produce a coronavirus treatment or vaccine, but we are interested in the fact that despite the importance of pharmaceutical products in customers’ lives, these stocks are still at depressed levels compared to pre-COVID highs. We are focused on companies with broad and undeferrable portfolios meeting critical needs that cannot be deferred. We are also preferring companies with powerful biotech platforms to leverage.
BMY sports a coherent portfolio of drugs with a big focus on oncology and combination drug opportunities. The Celgene acquisition makes its pipeline more safe, and introduces powerful biotech platforms for oncological immunomodulation (Revlimid) as well as epigenetics based drugs, a medical frontier. Balance sheet less safe than other picks, but acquisition is strategically sound and helps consolidate position in very cash-generative terminal condition management markets.
Near-term headwinds are potential problems with the Opdivo+Yervoy combination drug for first line lung cancer treatment, where it is in intense competition with Merck (NYSE:MRK). Generally, it is trying to shift from the adjuvant setting, which is a shorter lifetime value of customers to first line, and failure of Opdivo+Yervoy in lung cancer would put a dent in this strategy. So far, there has been promising data on the power of this combination for lung cancer treatment. Moreover, its recent Q1 earnings showed that people are still getting the necessary oncological treatments despite coronavirus, as they indeed need them to stay alive and cannot afford to defer treatment. Thus, results continue to be strong in the current environment.
The situation around the acquisition as well, due to its size, has meant that the outlook for BMY is a little hard to predict, as many accounting effects are coming into play with acquisition accounting and options vesting. Moreover, with the contingent value rights at play regarding liso-cell, further uncertainty lies around potential claims against the business. However, this distortion is simply a benefit, because when looking at Celgene as it was as a standalone entity, it was very cash-generative and more than capable of financing the debt used in its acquisition, and the complexity added by the CVRs and the acquisition accounting effects merely allows the extent of its proposition to go unnoticed by markets. We think that given the value of its drug portfolio in the adjuvant and increasingly first-line setting, built upon powerful proprietary biotech platforms, BMY is notably undervalued and a growth pick-up, and catalysts may come out of the failure of the CVRs to materialise.
Roche’s Achilles heel has always been the diagnostics division. In the last few years, the group’s performance and profitability were mainly coming from the pharmaceuticals segment that refers to development of medicines in the field of oncology, immunology, ophthalmology, infectious diseases and neuroscience. We now assume that diagnostics division sales will see growth driven by molecular and tissue diagnostics thanks to a new serology test launching in May that should provide a meaningful boost. This will provide resilience against perhaps less resilient markets like ophthalmology, consisting of primarily deferrable treatments.
Companies such as Gilead and Pfizer (PFE) are quite volatile. We are investors and not speculators and we prefer to take the side of the company with the best and the fastest molecular test in the market. As mass diagnostics becomes a matter of national security, the tests will be a more attractive cash generator for value investors than the discrete treatments for what might not be recurring diseases. It also turns a drag for the business into a potential asset.
Novartis has a substantial pipeline with sufficient replacement power to stop any worries of sudden declines caused by lack of products with sufficient IP protection. (Already 13 in registration phase, many more in phase I/II). Its growth drivers of recent launches and innovative medicines are actually driving a large portion of sales. These include among many others:
- Cosentyx: anti-inflammatory for treating psoriasis, etc. (anti-body based treatment, comes from a monoclonal antibody platform)
- Entresto: reduces blood-pressure for patients with chronic heart failure, reduces need to hospitalise and of death
- Promacta: increases platelet count in patients with chronically low platelet account
- Tafinlar: treats metastatic melanoma under certain mutational conditions
Launches are in interesting markets as well. However, the Beovu product for Wet-AMD (macular degeneration) has been panned pre-launch by sight-threatening safety concerns. A lot of expectation is on this drug to compete with Regeneron’s (NASDAQ:REGN) Eylea in a massive market.
Also acquired The Medicines Company for $9 billion, primarily for the Inclisiran drug for managing cholesterol. Not sure if this is such a great acquisition since hypercholesterol drugs are in intense price competition (Repatha by Amgen (AMGN) vs. Praluent by Regeneron). These competitor drugs almost generate $1 billion net sales, so the market is large.
Overall, it’s a traditional biopharma company with a rather full pipeline and nice exposures with platforms that can be used in many of the most interesting markets of today such as cholesterol management and AMD. Financial performance is good with strong sales and operating profit growth despite maturity.
AMGN has a broad portfolio with many drugs that are doing well in interesting markets. Although there is going to be a steady drop-off of some big moneymakers in the next 3 years, many well-performing drugs have a long runway from recent launches, even biosimilars, and might be able to compensate for lost revenue. It displays great capital discipline with substantial share repurchases and a smaller although very sustainable dividend. Good performance and track record for managing biosimilar competition. Also has a couple drugs in late-stage development that seem quite promising, but overall not as vigorous pipelines with clear platform as other competitors.
AMGN has a very large portfolio across many disease markets. It recently launched several biosimilars in oncology in collaboration with other companies like Allergan which are doing quite well.
Its main money makers are Enbrel, which treats arthritis and accounts for 25% of revenue and expires in exclusivity in 2023. Neulasta, an immune booster in post-chemo patients, which is 14% of revenue, down substantially due to a biosimilar launch by Mylan (NASDAQ:MYL) in 2018. Then there’s Prolia which accounts for 12% of revenue and is used for treating weak bones in post-menopausal women. Its patent expires in 2021.
Many recently launched drugs are beginning to gain traction, such as Aimovig, which is a potential blockbuster in the Migraine treatment market currently accounting for 48% of prescriptions in the first year of launch. There’s also Parsabiv for treating CKD in dialysis patients which is doing very well with expiries starting only in 2030. Additionally, other drugs already making good money are seeing continued strong growth and launch in foreign markets. This compensates for upcoming expiries and also the less than excellent new drug pipeline.
Although Amgen has made a substantial recovery from pre-COVID highs, it is still a resilient business providing a modest dividend, and should be a reasonable store of value.
Risks and Concluding Remarks
For companies like Bristol-Myers, the only real operational risk is to do with oncology clinics. In a second-wave scenario, activity might be more reduced. For the other companies, the portfolio of drugs is sufficiently diversified across essential markets whereby income risk and deferral risk are minimal, but they also could struggle in the downstream as clinics might be generally less active on matters outside of COVID-19. Nonetheless, these picks are still good stores of value, with BMY and Novartis even trading at a difficult to justify discount from historical prices. In this environment all of them would be at least justifiable equities to hold in a portfolio.
Disclosure: I am/we are long BMY, NVS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.