Pharma drug pipeline suddenly looking a lot healthier

The pharmaceutical industry had entered a long slowdown that is supposed to culminate in 2012-2013, when the industry reaches a patent expiration cliff. Up until recently, it didn't look like the new drug pipeline was going to replace the losses from the patent expiration and the increased generic competition. In the past few months, however, more approvals and positive clinical trials have changed the overall picture.

For example, Amgen Inc. (AMGN) posted positive results on its experimental denosumab bone drug. While today an advisory panel review at the FDA will likely center on safety, a decision is supposed to be reached by October 19 (but will likely be delayed, as is usual for the FDA). The drug is expected to be a blockbuster, with sales of over $1 billion a year, if not a mega-blockbuster.

Then there was Dendreon Corp.'s (DNDN) experimental prostate cancer treatment, the therapeutic vaccine Provenge, which was significantly successful in prolonging patient survival and also has blockbuster potential. Or Novartis AG's (NVS) success with its experimental COPD drug, which again, has a blockbuster potential. Or AstraZeneca's (AZN) experimental heart drug Brilinta, which was more effective than Sanofi-Aventis (SNY) and Bristol-Myers Squibb Co.'s (BMY) blockbuster Plavix. And so on.

Then we got the approvals. In the second quarter of 2009, the FDA approved 13 new molecules, twice the average of six in previous four quarters, as Ben Hirschler from Reuters reported. Perhaps the reason is the "U.S. Supreme Court ruling in March that drugmakers can be held liable for harm from medicines despite an FDA approval [which] has made the agency less risk-averse" and perhaps not. Regardless, the fact is the approvals and the success of clinical trials have increased.

Another interesting aspect that could again signify a revival in the whole sector is the fact that "biotech companies actually raised more money in the first half of this year than last year, and the third quarter is starting off similarly strong," as Trista Morrison of bNET Pharma reported. Despite In Vivo blog warning this includes a lot of "financings-under-duress," some of it is definitely due to good rather than bad news and potential interest from Big Pharma.

Have investors then priced this trend in the stock prices? It seems not. Traditionally, investors are skeptic about pharma pipelines when it comes to valuation as so many compounds don't succeed or even at a later stage don't pass the muster of regulators. But with the recent developments as well as the generally better-than-expected second quarter earnings where many showed fine management and restructuring skills (as opposed to revenue growth), and as many pharmas trade at historically depressed levels, investors could come back to the sector.

Reuters provided investors with a table showing consensus analyst expectations for leading pharmaceutical companies through to 2013. While Novartis, for example is expected to grow EPS by 28 percent from 2009 through 2013, grow revenue during that period by 24 percent enough to reflect potential from pipeline, it still trades at a low P/E multiple of 11.6 times 2009 earnings. AstraZeneca, despite the possible upcoming Brilinta is expected show EPS decline of 7.5 percent and its revenue is expected to decline by 11 percent as it trades at an 8.4 P/E. And while it's true Pfizer (PFE) now doesn't have much to boast about, it stands to add the more robust Wyeth (WYE) pipeline to its own, but investors still expect a decline of nine percent in revenue over the next four years.

Even if new drugs are approved it's not certain they could replace the losses one for one, not to mention grow revenue. But have investors punished pharmas enough in anticipation of this? Then there is the possible negative effect of the health care reforms. But again, some think the effect would only be negative short-term, but positive long-term. Could there be a case to return to pharmas now in light of the recent developments?

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