Damien Conover, CFA
Karen Andersen, CFA
Pharmaceuticals: While the majority of pharmaceutical companies are losing patents on major blockbuster drugs over the next five years, strong pipelines should provide stability and growth opportunities over the long run. Investors with long-term horizons could benefit from seeking the firms best-positioned to balance patent expirations with inline product growth and strong pipelines.
Biotech: As the market leader in both biotech and diagnostics, [Buy-rated] 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.
Genentech’s portfolio of blockbuster cancer biologics–which includes Avastin, Rituxan, and Herceptin–continues to grow quickly, as drugs gain market share in approved indications and garner widened approval in new indications.
We think Roche’s decision to fully absorb Genentech is well-timed; Genentech’s commercial structure in the U.S. is mature enough to complement Roche’s international operations without significant additional investment.
Buckingham Research Group
Specialty Pharmaceuticals: Following a strong 2009 performance, there is some temptation to be more cautious; however, given that the health care sector overall has lagged in the 2009 recovery, we still find opportunities. We believe that (1) low-cost health care (generics/store brands) and (2) drug companies with differentiable strategies will be winners.
Some conclusion is likely to the health care reform issue in 2010, and our best guess is a package close to the Senate Bill (taxes near term, coverage long term). For pharma companies, certainty around reform could trigger gains as part of a sector rally.
For 2009, specialty pharma (23 stocks, market-cap weighted) were up 64.2% outperforming a 23.5% increase the S&P 500 Index … Our top picks are Teva, King and Perrigo, followed by Warner Chilcott and Watson.
We continue to see Watson’s shares as attractive, as we maintain a 12-month target of $48 a share. Our $3.45 per share forecast appears achievable with a generic Pulmicort launch and mid-point of guidance ($3.175) is above $3.10 consensus. Watson expects Arrow (acquired late ’09) to yield generic R&D synergies as combined generic spend for 2010 should be $170 million to $180 million vs. about $208 million pro-forma 2009. Watson still expects 100 global generic submissions in 2010. The key to Arrow is international growth, and Watson is guiding to $600 million for international generic sales for 2010, well above our $474 million model.
Buy-rated Watson could receive approval and launch generic Cardizem LA (hypertension/ originally expected in April) and additional strengths of generic Toprol XL (hypertension) in the near term.
John W. Ransom
Raymond James & Associates
Health Care: A review of Wolters Kluwer Health Source full-year 2009 prescription data suggests that pharmaceutical sales and prescriptions (“scripts”) witnessed a rather dramatic improvement in overall demand throughout the year (2H09 better than 1H09), as the pressures (economic softness and the stressed consumer, the Zyrtec OTC switch and a myriad of FDA black-box warnings in key therapeutic categories) that weighed on total demand in 2H08 and 1Q09 subsided, and the industry benefited from an earlier-than-expected flu season (and a return to more normalized growth rates).
Besides the monthly data, we have also compiled the quarterly and annual market scripts and sales data for the period ending December 2009. As the data indicates, 2009 trends were clearly an improvement off of the soft 2008 levels.