With worldwide spending on prescription drugs increasing from an estimated $774 billion in 2017 to over $1 trillion in 2022, a rising tide of pharmaceutical sales is lifting a lot of drug company boats and creating plenty of opportunities for investors. Much of the profit from this boom will accrue to riskier, entrepreneurial enterprises specializing in a particular new approach, but among the big pharma companies that conservative investors value for their stability, diversification, and cash generation, there will be relative winners and losers.
According to analysis by market research firm EvaluatePharma, 19 of the top 20 sellers of prescription drugs will grow sales between 2016 and 2022, but only three of them that are publicly traded will increase market share. These three companies are winning in very different ways.
Making a big success even bigger
Bristol-Myers Squibb (NYSE:BMY) is projected to barely sneak into the market share winner's circle by increasing its share from 2.3% in 2016 to 2.4% in 2022. To understand the growth drivers that could make the company move ahead of the competition in the next five years, you don't have to look any further than Bristol's lead cancer drug, Opdivo.
Opdivo is the company's general purpose anti-cancer drug that belongs to a class of drugs called PD-1 immune checkpoint inhibitors. These drugs disarm one of cancer's defense mechanisms, allowing the body's own immune system to attack it. When Bristol won approval for Opdivo for melanoma in 2014, the market quickly realized the potential for the drug in fighting many types of cancer. Indeed, since then, the drug has been approved for fighting non-small-cell lung cancer (NSCLC), kidney cancer, lymphoma, cancer of the head and neck, bladder cancer, colorectal cancer, and liver cancer.
The approved indications for Opdivo are just the start, though. Most of these indications are for use when other treatments have failed, and Bristol-Myers is working hard to win approval for first-line treatments and to expand the types of cancers the drug can be used to fight. Since Opdivo works by making the tumor more vulnerable, there is tremendous potential to use it in combination with other drugs, and Bristol is devoting significant R&D resources to winning approvals for these combo treatments. Evaluate Pharma estimates that 2022 sales of Opdivo will amount to $9.9 billion, up 162% from sales in 2016.
That's not to say the Opdivo business is without challenges. Other companies have come out with their own competing PD-1 drugs and stand to give Bristol-Myers a run for its money, most notably Merck's Keytruda, which won the race for approval of first-line treatment of NSCLC. In fact, last year's EvaluatePharma projection put 2022 Opdivo sales at $14.6 billion; competitive factors have caused analysts to knock 32% off of Opdivo projections, and there's a chance that trend will continue.
To be sure, Bristol-Myers Squibb has other drugs in the portfolio that are projected to grow as well, notably blood anti-coagulant Eliquis, expected to increase sales at a 17% annual rate to $8.4 billion in 2022. The company also has plenty of value in its pipeline, including 10 other immuno-oncology compounds. But much of that value won't turn into sales in the next five years, and in the meantime, the company's biggest bet is under competitive attack, which threatens Bristol's projected, narrow market share gain.
Growth by acquisition
Irish drug firm Shire plc (NASDAQ:SHPG) is projected to have a larger share gain, growing from a 1.4% market share to 1.8% in 2022. Shire has taken the approach of leveraging its balance sheet to make acquisitions to fuel its growth. The biggest of these has been the $32 billion purchase of Baxalta in 2016, which itself was spun off from Baxter International the year before.
Shire's ambition to be the top biotechnology company focused on rare diseases was given a jump start by the Baxalta deal. Baxalta brought with it valuable growth assets in hematology, immunology, and oncology to add to Shire's portfolio in neuroscience, lysosomal storage diseases, gastrointestinal/endocrine illnesses, hereditary angioedema, and ophthalmics.
The strategy is paying off. Hematology drugs are now the company's largest segment, with 3% constant-currency growth in the last quarter. The immunology franchise is almost as big and grew a surprisingly high 32%, and the smaller oncology business was up 22%. In Shire's legacy ophthalmology business, the new dry eye drug Xiidra only contributed $77 million in sales last quarter, but could end up being a $1 billion blockbuster in a few years.
Shire also has a diversified pipeline that should contribute to growth. The most promising is probably SHP643, a new drug for heriditary angioedema that EvaluatePharma believes is in the top 20 most valuable R&D projects in the industry, worth a net present value of over $5 billion.
Despite the growth possibilities, investors have been pretty cool on Shire shares since before the Baxalta purchase. The biggest segment of the company's legacy business is its ADHD franchise, and observers are worried about cost pressures from generic threats. Also, the biggest chunk of the Baxalta assets, its hematology drugs, is under threat by new drugs expected from Roche. Consequently, the shares are cheap, selling for only nine times analysts' consensus estimate for 2018 earnings.
Many ways to win
EvaluatePharma predicts the biggest market share winner in the next five years will be Celgene (NASDAQ:CELG), growing its share from 1.4% in 2016 to 2.5% in 2022. The size of the company's share growth is not the only thing that sets Celgene apart from the rest of the pack; the way it's likely to achieve that growth is also different.
Like Bristol-Myers, Celgene is highly dependent on one particular blockbuster now and through the next five years. The company's immunomodulator drug for multiple myeloma and leukemia, Revlimid, is one of the industry's top-selling drugs and comprised 63% of total sales in the most recent quarter. Sales of the drug are still growing, thanks to market share gains, increased duration of treatment, and new indications, so expected Revlimid sales growth of 13% worldwide through 2022 is an important growth engine. The company has patents for Revlimid that extend out to 2027 in the U.S. and 2024 in Europe, but struck a deal with Natco Pharma that allows a generic version to launch in the U.S. in 2022 with limitations on sales volumes.
But the company has other blockbusters in the current portfolio generating growth as well. Pomalyst, a drug for multiple myeloma, grew sales 22% last quarter and is projected to grow 13% annually through 2022. Sales of immunosuppressant drug Otezla were up 12% in Q3 and future growth is expected to be on the order of 24%. Billion-dollar cancer drug Abraxane is turning in single-digit growth as well.
Celgene's pipeline will likely contribute sales in the next five years, also. EvaluatePharma believes anti-inflammatory ozanimod, now in phase 3 trials, will be selling at a $1.8 billion pace in 2022. Celgene's outlook for 2020 also includes $700 million to $1.4 billion of revenue for new products and indications in hematology.
Which is the best choice for growth investors?
All three of these companies are worthy considerations for risk-tolerant growth investors, given the outlook for market share growth. Bristol-Myers Squibb pays a healthy 2.6% yield and has a huge winner with Opdivo. Shire's strategy of growth by acquisition has left it with the weakest balance sheet of the three, but investor indifference to its story has made it the cheapest, at about nine times analyst projections of 2018 earnings.
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But my choice of the three would be Celgene. Despite some recent setbacks, the company has plenty of ways to grow. The biggest drugs in its pipeline still have plenty of growth ahead, the pipeline should contribute at least one more blockbuster before too long, and its solid balance sheet and strong cash generation give the company options to make gains through acquisitions as well. With a reasonable price tag on the shares, and sales growth that EvaluatePharma estimates to be 15% annually for the next five years, Celgene is the best bet in my view.