The credit-rating and stock-picking arms of
Standard & Poor's
agree that Big Pharma should show some gains this year despite incessant battering by generic competition.
"Despite near-term uncertainties over pricing and patent expirations, we think pharmaceuticals remains one of the healthiest and widest-margin U.S. industries," says Herman Saftlas, an S&P senior equity analyst. Saftlas issued a recent research report in which he raised his outlook to positive from neutral on the big-drug sector.
"We see longer-term prospects enhanced by demographic growth in the elderly (accounting for about 33% of industry sales) and by a healthy number of products in the pipeline," says Saftlas, who adds that many big drugmakers offer "attractive" price-to-earnings ratios and dividend yields.
Arthur Wong, an S&P credit analyst, wrote in a separate report on big U.S. drug companies that "much has been made of the pharmaceutical industry's lack of productivity and the dearth of major products. However, the pipelines are not empty."
Wong says 2006 will be a rough year for many big U.S. companies because around $23 billion in drug sales will succumb to patent expirations. Pfizer will lose 20% of its sales in the next three years due to generic competition, Wong says. However, Pfizer also has three drugs on S&P's list of the top 10 drugs to watch this year -- the
inhaled insulin Exubera, the
kidney and stomach cancer drug Sutent and the insomnia drug Indiplon.
Exubera and Sutent were recently approved by the Food and Drug Administration, and the agency is expected to act in May on Indiplon. Pfizer has a marketing and development deal with Indiplon's developer,
S&P's top 10 list focuses on drugs that should produce more than $1 billion in sales. "The commercial success -- or lack thereof -- of these products may have credit-rating implications," Wong's report says.
The 2006 list includes five holdovers from last year, including Exubera and Indiplon. Another repeater is Tysabri, the multiple sclerosis drug that's trying to make a comeback.
, Tysabri was withdrawn in February 2005 after having been available for only a few months. The companies pulled the drug after receiving two reports of a rare, often fatal, brain disease. A third case was later identified.
Last week, the companies received FDA clearance to resume a clinical trial of Tysabri with MS patients. An FDA advisory committee
meets next month to consider whether they think the drug can return to the market.
Tysabri is "critical to Elan's efforts to stem cash outflows and become profitable again," says S&P. "The company has no other high-potential prospects in its pipeline. Tysabri is nowhere near as critical for Biogen."
S&P predicts Tysabri will be approved by the FDA, adding that "the drug's blockbuster potential still exists." Still, it will take some time for doctors and patients to "get comfortable with the safety concerns before sales accelerate."
Another holdover candidate on S&P's list is Orencia, a rheumatoid arthritis drug from
was recently approved by the FDA.
S&P says Orencia is important not only because it's entering a fast-growing market, but also because it must take up the sales burden of Pargluva, an experimental diabetes drug whose prospects have
diminished significantly. The company reported in October that it may have to conduct more clinical trials -- taking perhaps five years -- to meet conditions set by the FDA for approval. The company said it might have to scrap the drug.
The FDA's action prompted Moody's Investors Service to consider reducing the credit rating of Bristol-Myers Squibb. The bond-rating firm said Wednesday it would keep the long-term rating, affecting $6 billion in debt, at A-1, an "upper medium grade" designation. The outlook remains negative.
The other top S&P pick for 2006 that was also on last year's list is Gardasil, the
vaccine for human papillomavirus designed to prevent cervical cancer. S&P says Gardasil is the most important product that Merck developed on its own. The company recently submitted the vaccine for
Other members of the S&P top 10 list include a pair of experimental schizophrenia drugs, Paliperidone ER from
Johnson & Johnson
and Bifeprunox from
. The experimental sleep-disorders treatment Nuvigil from
and an easier-to-use version of Xopenex, the asthma drug from
, also made the list.