The media blitz over jacked-up drug prices and concerns over slowing growth in China may have temporarily kicked the breath out of pharma valuations, but some analysts think the concerns will be short-lived and a return to growth is inevitable. In the meantime, they see the pullback as a breath of fresh air for investors who had been dealing with an overheated market for some time but who may now pick up some bargains. And which companies might that be?
To Damien Conover, director of healthcare equity research and equity strategy for Morningstar, Allergan ($AGN) and Amgen ($AMGN) look mighty good right now.
Conover likes the fact that Allergan CEO Brent Saunders is unloading the company's generics portfolio to Teva ($TEVA) for more than $40.5 billion. The move will allow it to pay down debt and give leave enough cash to make more of the kinds of acquisitions that have transformed Allergan into a high-margin branded drug company from the low-margin generics maker it started as just a few years ago.
|Allergan CEO Brent Saunders|
As for those branded products, he thinks drugs like wrinkle smoother Botox have "limited competitive risks" and so protect the drugmaker from "the concerns surrounding the slowing global growth." He sees Allergan as a drugmaker that has built a strong sales force with a keen focus on products that "should support high earnings growth." He just thinks right now, Allergan is not getting the love from investors it deserves.
As for Amgen, Conover acknowledges that 40% of total sales are at risk to biosimilars over the next 5 years. In fact, Novartis' ($NVS) Sandoz unit Friday said that the FDA is now considering approval of its second biosimilar of an Amgen drug. This one is for a copy of Enbrel, a drug that accounts for $9 billion in revenue for Amgen.
But the analyst says that Amgen will overcome those challenges. For the here and now, he notes that Amgen's cancer fighter Kyprolis and osteoporosis drugs Prolia and Xgeva are raking in the revenues, while its just launched PCSK9 cholesterol-fighter Repatha will add heft to its bottom line. On top of that, the analyst points out that Amgen is working on its own portfolio of biosimilars and thinks that with its reputation for making quality biologics the California-based drugmaker can capture 10% of the global biosimilars market for itself.
Underlying all of his predictions, is Conover's belief that the M&A market will continue to drive some valuations while strong drug launches and excellent clinical data in areas like oncology are "increasing the productivity of drug and biotech companies." And don't forget the "inelastic nature of healthcare," he said. Lots of places have growing elderly populations that will need more drugs.
- read the Morningstar report