20 Jan In 2009, expect a year of transformation in life science
2008 will not be a year to forget for both the pharma and biotech industries, but 2009 may be the year of radical transformation.
Many Big Pharmas have already approached the famed “cliff of patent expiration” with generic competition to their treasured blockbuster products. Big Biotech will most likely also face this cliff in the U.S. during 2009 with an imminent approval of a “bio-similars” approval process.
These two catalysts are forcing the rate of innovation and transformation of companies to accelerate. For example, venerable research-based Merck announced in December that it would enter the “bio-similars competition, pitting itself against other generic leaders such as Teva and Novartis (Chicago’s Hospira has also entered this race and launched its first bio-similars product in Europe last year).
Another sector that also needs transformation is the U.S. Government healthcare-related organizations starting with the U.S. Food & Drug Administration (FDA), which, in its quest for more and more safety data on drugs, devices, and diagnostics, requires more and more specialized personnel to review and analyze this documentation, making the approval process longer, more expensive and riskier. Such transformation in the FDA is not yet apparent. Yes, the FDA approved 24 new drugs in 2008 versus 18 the year (22 in 2006 and 20 in 2005), or 2 drugs/month; however considering the number of drugs in development, particularly in phase III, this is a drop in the proverbial “drug development bucket”.
According to a January 2 Wall Street Journal article on the FDA, “… 2008 will be remembered more for delays in the approval process. The FDA missed its original deadline to act on several drugs… According to the FDA, the agency missed its deadlines on 32 out of 159 drug applications through Oct. 32, or 21 percent of the time.”
Part of the FDA’s own transformation in 2009 will be to address a more rapid review process as it hired 800 employees in its drug division to review drug proposals, according to the same article. One issue will be the appropriate training of these new hires. Additionally, as the article cites, legislation passed last year gave the FDA more money to hire more drug reviewers.
Before we leave 2008 in the dust, it is important to take another look at the recent past for lessons learned. According to an article in the Financial Times on January 5, 2009 entitled “Pharma Buying Spree Could Swallow Biotechs,” a whole new tier of senior management at Big Pharma emerged in 2008: ”All of the top 15 pharmaceuticals companies have undergone senior executive-level changes within the last two years… with a new line-up of management at seven of the 10 largest pharma groups.”
Although full financial results for these companies are not yet available, let’s first take a look at how the key indices of the market performed and then take a look at the stock results for the leading pharma and biotech companies:
Performance of Major Stock Indices – 2008
|Index||2008 – Starting Level (1/2/08)||2008 – Yearend Level||%
|Dow Jones Industrials||13,261.82||8,776.39||<34%>|
Source: Yahoo Financial Page, Dec. 31, 2008
Surprisingly, both the pharmaceuticals and biotech indices, while negative for 2008, substantially bested the more conventional indices, with the broad-based NASDAQ Biotech index performing best in the group.
Let’s look at the larger cap life science companies:
Performance of Major Pharma and Biotech Companies
|Company/Ticker Symbol||Stock Price – Starting 2008||Stock Price – Yearend 2008||%
|1. Johnson & Johnson (JNJ)||$66.56||$59.83||<10%>||$166.0|
|2. Pfizer (PFE)||$22.76||$17.71||<22%>||$119.42|
|3. Novartis (NVS)||$54.79||$51.39||<6%>||$112.7|
|4. GlaxoSmithKline (GSK)||$50.45||37.27||<26%>||$95.21|
|5. Genentech (DNA)||$67.15||$82.91||+23%||$87.22|
|6. Sanofi-Aventis (SNY)||$46.35||$32.16||<31%>||$83.93|
|7. Abbott Labs (ABT)||$56.15||$53.37||<5%>||$82.81|
|8. Merck MRK)||$58.15||$30.40||<48%>||$64.3|
|9. Amgen (AMGN)||$46.60||$57.75||+24%||$61.19|
|10. AstraZeneca (AZN)||$42.87||$41.03||<4%>||$59.37|
|11. Wyeth (WYE)||$44.21||$37.51||<15%>||$49.94|
|12. Gilead Sciences (GILD)||$45.96||$51.14||+11%||$46.56|
|13.Bristol-Myers Squibb (BMY)||$26.50||$23.25||<12%>||$46.03|
|14. Eli Lilly (LLY)||$53.46||$40.27||<25%>||$45.79|
|15. Baxter International (BAX)||$57.90||$53.59||<7%>||$33.2|
Source: Yahoo Financial Page, Dec. 31, 2008
Note: Does not include Hoffman-LaRoche and Bayer-Scheriing data; Roche owns 51% of Genentech; BLUE signifies biotech companies
It’s very significant that there are now three biotech companies in the leading pharma companies, at least as measured by market capitalization. Genentech might just be the first biotech company to crack the ethereal $100 billion valuation during 2009. It is also amazing to see Gilead Sciences ahead of traditional powerhouses Bristol-Myers, Eli Lilly, and even Baxter. All of the major Big Pharma companies had stock price declines; however AstraZeneca, Abbott, Novartis, and Johnson & Johnson weathered a terrible market fairly well with relatively small declines.
Another analysis not included here but mentioned in another article at the end of last year, is the cash position of all of these companies, which in a number of cases is surprisingly strong. This factor will enable these companies during 2009 to further transform their business to survive the patent expiration cliff and transition into pharma/biotech hybrids.
It is indeed going to be interesting to watch this transformation process, not unlike the movie, “The Transformers.”
A musical end to 2008
During the last 2 weeks of 2008, I had the opportunity to catch up on some rock music and theater and took in some performances worth mentioning:
- “Million Dollar Quartet,” a musical which takes place at the Apollo Theater in Chicago, charters an historic event: the first and only one time coming together in December, 1956 of 4 seminal rock/folk/country musicians: Elvis Presley, Johnny Cash, Carl Perkins, Jerry Lee Lewis at the Sun Records recording studio in Memphis, Tennessee. These 4 were brought together by Sam Phillips, considered by some to be the father of Rock N’ Roll, who was the owner of Sun Records. Phillips was also instrumental in launching the careers of other rock greats such as B.B. King, Roy Orbison, and Ike Turner. In the musical, all 4 are in different stages of their career when they come together that one fateful night: Elvis has become a success in Hollywood, Johnny Cash has become a recording success, Carl Perkins had successfully released “Blue Suede Shoes” and Jerry Lee Lewis had just been signed by Sun Records. Elvis, who died in 1977 at age 42, would have been 74 on January 8th. Johnny Cash who was older than Elvis and lived longer (he lived until 2003 and died at age 71) would have been 77 if he were still alive. Carl Perkins was born in the same year as Johnny Cash and lived until age 65 (1998), and would have been also 77 if he were still alive. Jerry Lee Lewis was born the same year as Elvis, and at 73 is the only one of the 4 still alive. The musical represents a jam of all 4 with all 4 collaborating on each other’s songs. The actors all have excellent musical abilities and some semblance to the historic personage they are playing. The show definitely rocks, as you are immersed in the strains of early rock n’roll bringing a grin to your face and a lot of toe tapping.
- Arthur Lee Land – This remarkable rock musician, not to be confused by the rock performer of the 1960s of the same name who played in the band Love, who used to hail from Highwood, Illinois but then moved on to Boulder, Colorado, and now resides in Fairfield, Iowa, is a one-man band. Arthur describes his music as Afrograss Flavored Folk Rock. Although he is principally a virtuoso guitarist with a style ranging from Jerry Garcia to gritty blues to hot country western licks and more, he is also a percussionist who surrounds himself with more than a dozen different percussion instruments from Latin American and Africa. His show, and it is quite a show, is a demonstration through the use of live looping of how one person can create around him a multiperson band. Watching Arthur perform is like witnessing the production of a 12-layer cake, as he starts out each song with one of a number of percussion instruments, followed quickly by others, which get endlessly looped. After 4-5 percussion instruments are layered in he moves to a bass guitar, which is already set up on a stand so that he can just step up behind it and lay down a bass pattern. Next come some rhythmic guitar patterns either on his acoustic or electic. Finally, he will add in yet another guitar layer with his amazingly versatile riffs evoking many different styles, and sing. The singing then miraculously soon becomes a harmonizing chorus. Due to the amazing array of electronic equipment he has, at one point he leaves the stage while all the music continues in its rhythmic loop; from the audience he seeks out common items that he will then bring on stage to coax out some unique sound and loop it into yet another musical layer. To get a sense of all this movement, checkout the videos on Arthur’s website. I also picked up his latest CD at the performance, Dragonfly (2005), which contains a number of the songs Arthur played that night. If you hear about Arthur coming to Chicago – don’t miss him!
A Happy and Healthy New Year! See you soon!
Recent article by Michael Rosen
This article previously appeared in MidwestBusiness.com, and was reprinted with its permission. The article is not meant to be a stock recommendation.
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