Research's Health Care Guide:
- Beckman Coulter Inc. (BEC)
- Roche Holding AG (RHHBY)
- Watson Pharmaceuticals Inc. (WPI)
Karen Andersen, CFA
Senior pharmaceutical analyst Damien Conover wrote about the challenges of patent expirations in an article earlier this year, citing the 2011 patent cliff as a hurdle that large pharma firms are being forced to combat with heftier drug pipelines and sizeable acquisitions. However, these patent expirations are tied to small molecule (or conventional) drugs -- produced in a lab via chemical synthesis.
In contrast, most biotech drugs, or biologics, are manufactured using living cells. With a few exceptions relating to the oldest biologics, there is no pathway for the approval of generic versions of biologics (or "biosimilars") in the United States, and the complexity of biologics manufacturing has so far prevented a new law allowing such products from making its way through Congress.
While drug spending growth has moderated since 2007, as several blockbuster drugs begin to experience generic competition, the lack of a regulatory pathway for biosimilars has left branded biologics largely immune to such pressure in the U.S. The passage of large-scale health-care reform hinges on finding ways to pay for universal coverage, and biosimilars could find a place within such legislation this summer.
Biosimilar drugmakers face many new challenges not seen with small molecule generics, such as steeper costs related to manufacturing, development, and marketing. Patients and physicians could be hesitant to switch to biosimilars due to fears over quality and efficacy. Insurers could even have a hard time encouraging their use; biologics are usually reimbursed as medical benefits, not pharmacy benefits, and therefore don't have the tiered formularies and co-pays that pharmacy drugs do.
We think all of these challenges would conspire to allow branded biotech to retain significant market share beyond patent expirations. In addition, small market share and high development costs would force biosimilar drugmakers to price their products at levels approaching those of branded alternatives, reducing the cost-savings potential of an emerging biosimilar industry.
We expect pending legislation to give biotechs the exclusivity they need to remain innovative and profitable. The debate over the long-term effect of biosimilars on biotech firms really comes down to innovation, and most of the bigger biotechs are well-positioned to create either improved versions of their current drugs or completely novel drugs by the time biosimilars enter their markets.
Roche's first-half results were slightly stronger than our estimates, as the Genentech acquisition appears to be producing larger and more rapid synergies than we had anticipated, and sales growth in Roche's pharmaceutical and diagnostic divisions are surpassing comparable market growth by a wide margin.
We're maintaining our fair value estimate, and we continue to believe that low generic and biosimilar exposure - as well as a broad, innovative portfolio of products and drug candidates - give Roche the strongest competitive advantage in biotech.
As a market leader in both biotech and diagnostics, Roche is in a unique position to guide global health care into a safer, more personalized and more cost-effective endeavor. Key acquisitions, such as Ventana Medical and Genentech, complement this firm's innovative offerings, and we're confident in the sustainability of Roche's competitive advantages.
Michael Tong, CFA
Wells Fargo Securities
Watson Pharmaceuticals received Federal Drug Administration approval of generic Toprol XL [a beta-blocker used to treat angina and high blood pressure] in the 25 mg and 50 mg dosage strengths. The market value (brand and generic) of these two strengths is about $600 million. WPI intends to launch immediately. The approved strengths represent about 70 percent of the prescriptions for the Toprol XL franchise.
Watson Pharmaceuticals was cautiously optimistic about possible approval later this year of the 100 mg and 200 mg strengths. These two strengths account for the remaining roughly 30 percent of prescriptions of Toprol XL.
We rate Watson Pharmaceuticals shares outperform. We believe WPI has reached an inflection point in its business prospects, driven by resumption of product output at its Davie, Fla., facility, two new proprietary product launches in 2009, and potential contribution from generic versions of Toprol XL and Concerta [used to treat attention-deficit disorders].
Watson Pharmaceuticals' second-quarter 2009 financial results indicate the company remains on track for continuous improvement. Cost efficiency and new product flow should continue to drive margin expansion. In addition, through business develop activities and the proposed acquisition of Arrow, management has positioned the company for sustained growth in 2010 and beyond, in our view.
Oppenheimer & Co.
Earth-shattering it wasn't, but this year's American Association for Clinical Chemistry [meeting] did leave us with increased conviction in Beckman Coulter's new Olympus product lines and synergies - and Beckman Coulter remains a top pick for us.
Beckman Coulter management expressed increased confidence that cost synergies will be available soon after the deal closes in early August, with about $25 million to $30 million falling off in the first few months alone: about $20 million from research and development and the rest from general and administrative (sales and marketing synergies will increase throughout the first few quarters).
Further on Olympus, we spoke to several contacts at the show who continued to give us confidence in the capability of the product line. Sales reps were enthusiastic to now have an immunoassay line to sell into their U.S. reference lab call point, about 30 percent of Olympus' current business.
There is a real opportunity for Beckman Coulter to improve its own products and testing menu via Olympus' technology over time. While Olympus' sales synergies in Europe have been a key highlight of the deal, the two more underestimated opportunities are (1) at the U.S. reference lab and (2) through increased Olympus reagent sales worldwide (as a portion of Olympus' reagents are today sold to labs by third parties, and Beckman Coulter will bring these in house).