Morningstar analyst Damien Conover outlines which new drugs and clinical trials hold the most potential for the industry.
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Alex Morozov: Associate Director of a Healthcare team here at Morningstar. 2008 was a fairly challenging year for the pharmaceutical as sector. And joining me today is Damon Conover our senior pharmaceutical analysts to discus 2008 and to see how the 2009 is different from 2008. Welcome Damon!
Damon Conover: Great! Thanks for having me Alex.
Alex Morozov: Well, let’s start with 2008, it was un-character realistic you weak year for pharmaceutical sector. Can you elaborate a little bit on?
Damon Conover: Yes, what we saw on 2008 was that most of the large pharmaceutical companies took about a 25% here cut. Not guaranteed the market was down more than that but it’s still is quit a bit of a fall for a lot that happen in the market. They really don’t impact the large pharmaceutical companies. So, what we saw on 2008 were a few specific things that really hurt the entire sector. First off, a lot of pond expiration, so almost all the pharmaceutical companies had a major product loss explicability that really hurt there earnings power.
So, now as we look in to 2009 we really only see couple pond expiration. So, we think the earnings will hold up very well in 2009. Now, the one thing I think that’s on everybody’s mind is not so much 2009 but 2011 in that pattern cleft. Now, what’s happening in there we think has already been factored into the pharmaceutical stocks hence a very low multiples. And so we think 2009 was set up a really good year for this companies looking in to 2011.
Alex Morozov: Well, what about new drugs? We expect to now the Levator on a rising?
Damon Conover: We always are hoping for next Levator but we don’t think there is any Levator out there but we think there are some really powerful new drugs coming to market. The drug that we like them most is Eli Lily’s it’s similar for some Myers Plavix but it’s a little bit more effective, a little bit more side effect issue but we thinks it will be a major blockbuster product. Now, we think that could be approving as early as the first half of the 2009. And we really think that could be a catalyst for the entire group. I think investors will see drugs can get approve on the sector and they cannot only be approved but approved in blockbuster indications.
Outside of that one we also like some of the other new drugs that are coming to the market that have been recently approved. For example, we like Tecturna from Novartis was approved about a year and half ago but it’s just starting the game traction. It’s a cardiovascular drug as well, it’s a new way to treat cardiovascular disease. And we think Novartis is really can get behind the sells in marketing of the drug after bought out all the right from Speedel and also the drug that we think could push earnings furthers for entire group is Trilipix, this is a new drug coming from Abbot. It’s again another cardiovascular drug that works in tandem we think its got blockbuster potentials so a lot of great news will coming out for a new drugs to push the earnings of a individual companies but also have secured as a whole.
Alex Morozov: Well you mentioned several of drug approvals. What about any communicable data that would should be looking out in 2009?
Damon Conover: Yeah! That’s an important question. I think what were going to see is some very, very important news flow. In particular we see Novartis is stay that on its new multiple sclerosis drug and we think that could be a very favorable. Will see that about midyear, it’s called freedom trials and what make Novartis drugs so much better than some of the drugs currently on the market are two things. One, you can take it orally and secondly it look like it has incredible efficacy. So, will get that data in mid year and if it’s good we expect Novartis to file this drug by the end of the year. So, we think that’s really set up a nice neuroscience drug in the pipeline for Novartis for them to taking some of the pat losses in the out years.
Alex Morozov: What about on the accusation front, are we seeing anything from large pharma, a lot of noise have been made about Pfizer with its massive war chest of $25 billion close in cash. Anything on the accusation front that would should be looking up for?
Damon Conover: Yeah, I think so. You know I think 2009 is really to hear of accusation for big pharma. You know what the reason why I say that is that big pharma has tremendous among the cash on there balance sheets and a lot of accusation targets don’t have access to capital from a lot of other areas. I mean, everybody knows the credit market and equity market have very tuft and very hard to get any sort of deal flow down in those areas. So, that really leaves really one area for a capital and that’s big pharma. Big pharma is tons of cash, they need augment there pipelines and I think it’s a great way for them to do that is by doing some accusations. So, I think will see a lot of small cap accusation but I also thinks we’re going to start to see some mid cap accusations. And I think your question on Pfizer’s right, I think we’re definitely going to see them make a move and I think a company will fit well with them is biogenetic. It’s in cancer, it’s in neurology, it’s a biologics all the areas that Pfizer wants to get into. I think that would be nice way, you know when I look at Pfizer kind of the sleeping giant. And what I think about biogenetic, I think it can really wake up that sleeping giant be a cup of coffee for Pfizer.
Alex Morozov: Will the expect accusation are already started didn’t they, we have Johnson & Johnson acquire a mentor not so long ago and today Abbot announce that they’re acquire in advance medical optics at $22.00 a share. Can you comment on any of those accusations? Do they strengthen Abbots and Johnson & Johnson product pipelines?
Damon Conover: Yeah I think they do, I think they give Johnson & Johnson and Abbot a more diversified portfolio. I mean they are already free diverse already but now it just this strength in that diversity. And on top of that, I think it’s really signals that deals will get done and you can see that this both companies that they take over were companies that were kind in this healthcare area where to more elective. And so you know it’s not required as much as so your medicines to keep up your health here. Those types of companies who are going to be more likely to continue to bring in the revenue but companies that are more elective. You know your going to have a there is revenue is going to be a little bit more on jeopardy and I think big farmers can take advantage on that jeopardy and get in some accusations. So, I think that really speaks to the beginning on what we’re going to see as a big wave of accusations going forward in 2009.
Alex Morozov: Will let’s talk a little bit about PNL’s a lots of noise is been made about cut in cost on a pharmaceutical front. What are your thoughts, what is your outlook for 2009?
Damon Conover: Yeah! I mean cost cutting is going to be the major theme for the PNL for pharmaceutical companies. I think there is going to be cuts across the board. Every earning cost I think we are going to hear about he slightly tweak to restructuring but basically means less sales force, less spending marketing and the also I think we’re going to see less spending in RND which is a little bit newer. We haven’t seen as month, we’ve seen RND budgets tighten, but we haven’t seen them decline. And I don’t think they’re going to decline but I think they could tighten even further. And think there is a way that pharmaceutical companies can really maximize to RND output by putting less money into there RND resource budget and that’s through contract research organizations. I think we’re going to see a lot more deals, Merc just recently sign the deal with contract research organization really did earlier in 2008. I think we’re going to see more of that and it’s a way for pharma to stay productive and spend less.
Alex Morozov: Let’s talk about another political issue, and not a big issue and I know it’s is kind of heart to condense the political environment into one minute segment but can you talk a little bit about 2009 political climate and how that affects pharmaceutical companies.
Damon Conover: Right, so we’ve got a new administration in office and the democrats are intending to be a little bit less favorable for industry and healthcare. So I think we are going to face some hindrance from new government proposals. Although it’s going to be more slow and stay diverse as radical change, in particular with the recession going on the government is really got their plateful but I do think we are going to see some push torch more coverage on the way towards universal coverage. Will start probably with the youth, making sure all the youth are covered from the insurance standpoint and then gradually build up to props universal coverage. What that means is likely more pricing power for the government less pricing power for pharmaceutical companies and it makes a little bit more challenging I mean the one offset to that is your going to have more volume. So, initially it will probably even be a positive for pharmaceutical firms because they probably going to sell more drugs at more people are covered. Long term, it is going to be harder for pharmaceutical companies to continue the pass on. That single digit pricing increase each year.
Alex Morozov: Okay, what are your some of your favorite’s peaks on the pharmaceutical sector?
Damon Conover: Yeah, so one of the companies we really like a sharing plow. Now, always going to talk about the pan cleft in 2011 to 2013. Sharing Plow is one of the few big pharma firms that don’t face that cleft. It has really little pan exposure and in our opinion one of the best pipelines out there. Almost the better pipeline in Pfizer and it trends at fractional the market cab. So, we like sharing plow, great pipeline and low pan exposure. Another company that we like slow more diversified Novartis it has not only the branded segment but has also has generics vaccines and a consumer health care division. We really like that company we think its new meningitis vaccine will be a blockbuster and we think that gives a company a lot of upset.