Big pharma has been an interesting group of stocks for a while now due to the ongoing conflict between the patent cliff that has wrecked profitability of some of the industry's best-selling products, and the wave of innovation that has led to the development of several entirely new classes of breakthrough drugs. Spicing things up further, Obamacare, the retirement of the baby boomers, and the advent of new drugs for diseases with few to no treatment options previously have spurred growth in this sector like never before.
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As you would expect in such an environment, though, the industry sports both a number of winners and losers. Keeping with this idea, I think investors may want to grab some shares of Bristol-Myers Squibb (BMY -0.87%) and consider selling or avoiding GlaxoSmithKline (GSK -0.88%) right now. Here's why.
Bristol-Myers should have a strong long-term growth trajectory
Bristol's efforts to reorganize the company after dealing with a host of serious patent issues is starting to pay off. In the second quarter, for instance, the drugmaker's revenues grew by 7% to $4.2 billion, compared to the same period a year ago. Perhaps most impressively, global revenues jumped by 16% when excluding the negative impacts of a strong dollar.
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A deeper look at Bristol's recent financial performance, though, still paints a picture of a company that is very much in a state of flux. What I mean by this is that some of Bristol's current growth drivers, like its hep C franchise and oncology drug Yervoy, are probably going to fade into the background in the not-so-distant future because new, more effective competitors are entering their respective markets.
As a result, newer growth products like the cancer treatments Opdivo and Sprycel, the anti-inflammatory drug Orencia, the blood thinner Eliquis, and the experimental multiple myeloma drug elotuzumab are going to need to be the long-term value drivers for the company moving forward. That said, this diverse host of growth products should give Bristol ample juice on the revenue front. At present, the Street expects this Big Pharma to grow its bottom-line by nearly 20% on average for the next five years in a row -- largely because of these key products.
Aside from these high double-digit growth estimates, Bristol offers investors a solid balance sheet with over $10 billion in cash and cash equivalents per its second-quarter earnings report, and a dividend yield of 2.4% that should be sustainable going forward.
Glaxo has fundamental problems with no quick-fixes
The British pharma giant GlaxoSmithKline has been in free fall for a while now due to three core problems. First off, Glaxo has run into major headwinds with payers over its respiratory franchise consisting mainly of Advair, Anoro and Breo Ellipta. As a refresher, several U.S. insurance companies refused to cover Advair because the drug's price had risen markedly in the U.S. compared to the EU over the course of just a few years. And this problematic relationship with U.S. payers appears to have spilled over into the commercial launches of Anoro and Breo Ellipta, with many insurers being slow to offer coverage upon their commercial launches.
Source: Wikimedia
This complex coverage situation has definitely changed for the better in the last 12 months, but that's where Glaxo's second big problem comes into play -- Advair will most likely face generic competition in the U.S. soon. Mylan N.V. is reportedly attempting to bring a generic version of the top-selling asthma drug to market in 2016 when Advair's delivery device loses patent protection. Even Glaxo CEO Andrew Witty has admitted that U.S. Advair sales could crater by as much as 85% by 2020.
Normally, Big Pharmas combat patent problems using their robust clinical pipelines, and Glaxo is certainly trying to go this route with over 40 new experimental products in mid- to late-stage testing. Nevertheless, the company's third major problem is that it has one of the worst success rates in pivotal-stage studies among all of Big Pharma of late.
After its MAGE-A3 cancer vaccine failed multiple trials, for example, Glaxo essentially gave up on its oncology franchise and sold the unit to Novartis in a major asset swap last year. Making matters worse, Glaxo's high-profile experimental candidates for Duchenne muscular dystrophy (drisapersen) and cardiovascular disease (darapladib) also petered out in late-stage trials, giving the company relatively few clinical candidates that could actually right the ship, so to speak.
Tying it all together
The Big Pharma landscape is rugged terrain at present, filled with peaks and valleys. In my view, Bristol presents a potential mountain that investors may want to try to climb, and Glaxo is a valley that's probably best avoided in the near term.
