Pharmas in October 2018

[dropcap]P[/dropcap]harmas were resilient amid the October cliff in the market, with the fear-driven interest being well supported by the steady earnings, especially by the “Biggies’ in Q3. This was also reflected in the relative performance of the Big and the Smaller pharma – +0.19% vs -3.15%, respectively, in the month of October, whilst it was better to be seen with smaller players over most of the last 18 months.

Earnings roundup
The Big pharmas showed an impressive 6% average revenue growth at CER in the third quarter (ending September 2018) – Roche and Shire at 7%, Novartis, Sanofi and GSK at 6%.

Novo Nordisk was marginally lower with 5% growth but the top-line upgrade and sequential growth was encouraging.

Novartis, GSK and Sanofi also upgraded their guidance for the year.
Smaller guys on the other hand, largely reported an in line/non-eventful performance.
A key theme across the results was the solid emerging markets but mediocre Europe, with the likes of Novo Nordisk, Sanofi and GSK reporting healthy numbers in the emerging markets, particularly China.
Although pricing pressure continued to be prominent in the US, it was Europe which was savaged more due to increasing competition, including from the biosimilars.
For instance, Roche suffered massive biosimilar erosion for MabThera/Rituxan (49%) and Herceptin (-21%) in Europe.

Both Sanofi and Novo Nordisk faced a challenging environment for their basal insulin in the developed countries (Sanofi in particular), but they have been able to move these to the emerging markets.
Although this strategy does cost them margins, but the enormous volumes have compensated.

Trump comes back for Medicare Part B

After announcing some crystallised plans for clipping drug prices under Medicare Part B in August (more details in our sector note dated 6 September 2018), President Trump has proposed introducing the ‘International Pricing Index’ to align US drug prices with an international average.

The Department of Health and Human Services estimates that the total payment for these drugs would drop 30%. However, as with many other proposals, this also comes with more questions than answers and lacks specifics. It is expected to come into effect from 2020 and be phased in over five years.

The battle for tough-to-tame CNS diseases

Grifols recently showed promising data in Alzheimer’s research, re-igniting hopes for the industry.
A phase IIb trial has shown that extraction of plasma and replacement by a solution of albumin, a protein plasma with many therapeutic properties, can slow the progression of moderate-stage Alzheimer’s disease.

Although we acknowledge the humungous potential in the Alzheimer’s space with no effective cure currently, the failures rate (99%) dissuades us from expecting too much for Grifols as well.
As a reminder, the sector has seen some painful and high-profile failures in the past, including Eli Lilly‘s solanezumab, Pfizer and J&J’s bapineuzumab and Lundbeck’s Idalopirdine.

Grifols also saw some analyst downgrades in October, on account of a new treatment class, which has shown some promising data in mid-stage trials, including UCB‘s Rozanolixizumab.
This subcutaneous FcRn monoclonal antibody showed positive results in proof-of-concept study (phase IIa) for a neuromuscular disorder called myasthenia gravis (market size of ~$1bn in 2017).
UCB is now planning to accelerate the development of Rozanolixizumab for other neurological conditions induced by immunoglobulin G autoantibodies – it will be starting another phase II study in H2 19.

We continue to believe that these anti-FcRns, if successful, will pose a threat to plasma players like Grifols, CSL and Shire in the future, but it is too early and success, if at all, will take years to surface (unlikely before 2022).

Lundbeck reported disappointing data on its anti-psychotic drug, Lu AF35700, in phase III, triggering the largest decline (-27%) in the share price in the company’s history on 25 October 2018.
In the first phase III trial, dubbed Daybreak, on 964 patients over ten weeks, Lu AF35700 failed to beat the conventional treatments for treatment-resistant schizophrenia patients. It was the most advanced candidate in Lundbeck’s otherwise scanty late-stage R&D pipeline. A success could have meant blockbuster potential and the failure, therefore, is a massive setback in terms of investors’ confidence.

We had expected the drug to get approval by 2021 and be launched by 2022, with a 30% probability of success. In total, we had estimated the drug to generate sales of ~$800m by 2028 and with a 30% probability of success it contributed ~3% to our SOTP-based valuation, implying that the magnitude of the correction in the share price was more of an over-reaction.

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