Once upon a time, pharmaceutical stocks were the darling of Wall Street. Today, many companies that research and develop new treatments are disappointing shareholders.
Ultimately, that was the loss of those optimists. As value investors, we are not afraid of bad news as long as we get compensated by low valuations. Two stocks suffering bad news, Eli Lilly & Co. (NYSE:LLY) and Johnson & Johnson (NYSE:JNJ) , are not cheap in light of their growth prospects. On the other hand, Sanofi SA (ADR) (NYSE:SNY) and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) are attractively valued relative to their peers.
Bad news for Eli Lilly
After running unsuccessful trials of an experimental drug that was meant to treat rheumatoid arthritis, Eli Lilly has stated that it is discontinuing trials. Eiry Roberts, vice president of autoimmune product development said, “While we are obviously disappointed by these results in rheumatoid arthritis, we continue to believe that tabalumab could have significant potential for patients in other disease areas.” This strategic decision seems to be justified by many reasons. First, the company is likely to incur huge losses arising from stiff competition from generic producers in this market. Second, the company plans to modify the drug and be used as a cure for lupus. Studies that were done on tabalumab in December showed that the drug will not be of any benefit in the search for a cure for rheumatoid arthritis. This development is not good news for Lilly as it was expecting growth to be stimulated by the development of new medicine since its Schizophrenia drug is losing its market niche.
Trouble for Teva
As competition is getting stiffer for Provigil, the earnings for Teva Pharmaceuticals Industries dipped by 19 percent as a result of dwindling sales of generic drugs. Profits dropped to $1 billion from $1.4 billion. The decline in profits is a result of many factors such as loss of patent protection on key products. Provigil had lost patent protection last year recorded a drop in sales by 93 percent. While the best-selling product Copaxone which treats multiple sclerosis faces competition from generics. Last year the Chief Executive Officer Jeremy Levin pointed out that the company plans to stimulate growth by concentrating on developing treatment for illnesses related to respiratory and central nervous system. He said “aggressive business development” is what Teva plans to use in its growth strategy which also includes venturing into new markets, acquisition and licensing deals. Recent data indicates that Copaxone sales increased by 14 percent in quarter which translates to $1 billion. Unfortunately, the drug faces competition from Gilenya, a new oral treatment product manufactured by Novartis AG (ADR) (NYSE: NVS).
Sanofi SA (ADR) (NYSE:SNY) expects a 5 percent dip in profits because generic products are expected to cut into Plavix blood thinner sales in 2013. Also, the expensing new machinery is likely to reduce the amount of profit generated. Chris Viehbacher, CEO, has adopted partnerships and acquisitions to aid in the company’s drug supplies and recover the losses that arose as a result of top selling products being outsold by generics. The company is planning to introduce new products that will stimulate sales growth. These include Aubagio and Lyxumia which were recently approved in the European markets. After the company announced the much awaited combination clinical trials with Lantus and that its bestselling drug will not proceed planned, its stocks dipped 4 percent. The tests were postponed to later unspecified date due to a technical hitch with Fix Flex Pen which was to be used to inject the combination. Alistair Campbell and Louise Hinds analysts at Berenberg Bank both said in a note, “Significant delays to the insulin combination do not bode well for this franchise.” Lyxumia does not seem to be commercially viable when it stands alone according to the analysts. Although profits for this year are set to drop, the company assured that it is still on track to attain its 2015 targets.