Fight! Fight! Fight! In this week's episode of Industry Focus: Healthcare, Kristine Harjes and Todd Campbell pit four of the pharmaceutical industry's biggest drug companies against each other to weigh out today's best buys for healthcare investors. Who will emerge victorious?
From big pharma players GlaxoSmithKline (NYSE:GSK) and Pfizer (NYSE:PFE) to biotechs Biogen (NASDAQ:BIIB) and Celgene (NASDAQ:CELG), listen in to hear how the companies stack up for value, dividend, and growth investors. Also, we look at some of the most exciting aspects of each company, and some areas of concern that each will have to face in the next few years.
A full transcript follows the video.
This podcast was recorded on May 11, 2016.
Kristine Harjes: Best buys in biopharma. This is Industry Focus.
Welcome to the show. I'm your host, Kristine Harjes. It is May 11th, 2016, and I'm joined, as per usual, by Motley Fool healthcare contributor Todd Campbell, via Skype. Hi, Todd!
Todd Campbell: Hi, Kristine! It's beautiful here. Is it nice down in Alexandria?
Harjes: (laughs) No, definitely not. I think I've heard this is the single longest stretch of rainy days we've ever had in a spring. Don't quote me on that, but it's been pretty gosh-darn cloudy.
Campbell: Ugh, sorry to hear that!
Harjes: But I get to head to Arizona next week. Sunshine every day there.
Harjes: For today's show, we're on the heels of earnings season, so we thought we'd take a look at four popular healthcare companies today and pit them against each other, battle royal style. Two are widely known big pharmas and two are some of the largest biotechs. Within each category, which is the better buy? You'll have our answers by the end of this show.
Say you want to buy a household-name big pharma. Can I get a drumroll please, Todd, as I announce today's contenders? GlaxoSmithKline and Pfizer. Let's give a review of each company, then pick a winner. First up, let's do Glaxo.
Campbell: This is going to be an interesting conversation. We're going to have a lot of fun talking about it. We've got two Goliaths up against each other in pharmaceuticals that are diverging. I think you and I will have slightly different opinions on the two of these companies. You've got GlaxoSmithKline, which is probably best known for its asthma drugs, including Advair Diskus. Then, you've got Pfizer, which was very well known for being the maker of the top-selling drug on the planet, which was Lipitor, a cholesterol-fighting drug. Both of these companies, however, are seeing some pretty dramatic changes occurring within them that could influence where they go from here.
Harjes: Yeah. That's the story across all big pharma. More or less, you have really big-name brand drugs that are coming off of patent. When you look at GlaxoSmithKline, as you mentioned, Advair is the key drug to know the name of. This is for inhaled COPD and asthma, so, respiratory conditions. It has a generic coming soon. Actually, technically, the patent on this drug expired in 2010, but the patent on its Diskus device, which is still sort of a component of the drug, remains through 2016. Either way, face it, you've got a potential competitor coming out soon.
Campbell: Yeah, at Glaxo, that's the big wild card. Glaxo has tried, in the past, to assuage investor concerns about the risk to Advair Diskus by saying the Diskus is a complicated system that wouldn't be easily copied. The FDA has since then gone out and given some more guidance to the generics industry that maybe has cleared the path a bit better for a generic competitor to come to the market. Mylan, a big generic drugmaker, has already got an Advair Diskus in front of regulators in the E.U. They hope to do that with the FDA here soon. No idea when that could get approved, but that's the story you have to watch, because Advair counts for about $1 billion last quarter alone of roughly $5.2 billion in pharmaceuticals only sales at Glaxo. Glaxo does about $8 billion total, but of their pharmaceutical unit, they do about $5.2 billion. So, 20% or so of their pharmaceutical sales could be potentially at risk.
Harjes: But they're not just sitting there ready to get steamrolled by generic competition. They've got Theravance, which is their next-generation long-lasting respiratory product. That's designed to take the place of Advair. You also have some other drugs: Breo Ellipta, which is ramping up slowly -- same thing with Anoro Ellipta. These drugs did not come out of the gate very strongly, but they have made some progress. Breo Ellipta sales were up 171% year over year, and Anoro Ellipta was up 17% year over year. They're still not really moving the needle for Glaxo, but hopefully, the company can continue to see a speedy ramp-up of them.
Campbell: Those two drugs, Breo and Anoro, when those were approved, a lot of people thought they would absolutely be the ones, they would take the share away Advair Diskus, they would insulate Glaxo. Even with the growth that you mentioned, I think combined, they did about $150 million in sales last quarter, roughly about 15% of what Advair Diskus did. You have to put a lot of faith, basically, in the next-generation asthma drugs that are still coming. And I'm not sure whether or not that faith... I don't want to say deserved, because Breo and Anoro are selling well, but I'm not sure they can be the kind of drug that Advair Diskus has been.
Harjes: I will say, however -- and maybe you'll have to look outside of the respiratory franchise to really believe this statement -- going into fiscal 2015, the CEO, Sir Andrew Witty, laid out a goal of double-digit EPS accretion in 2016. And core EPS did rise 14%. So, we are seeing some progress by this company. HIV therapies were a pretty big part of this story. You've also got the asset swap with Novartis (NYSE:NVS), which, Todd, I'm sure you'll have some thoughts on that exchange. Essentially, Novartis acquired their oncology unit, and GlaxoSmithKline bought the Novartis vaccine unit, and they also joined up in a consumer healthcare product venture.
Campbell: Witty wants double-digit growth on the bottom line. And he's going to get there, but is he going to get there via growing the business, or from shrinking the business? One of the things, when I look at Glaxo, I say, "If you're going to try to get double-digit growth this year, but the Street only thinks you'll get 4% EPS growth next year, at some point, you've cut the costs you could cut from your business." I want to see Glaxo be able to generate closer to double-digit revenue growth, and then be able to leverage that against the cost-cutting for that profit growth. That's something, in my opinion, that Pfizer has already done in reducing costs in the post-Lipitor world. Now that Pfizer is starting to grow again, they're able to leverage that lower cost structure because of those rising sales.
Harjes: Before we completely pivot to Pfizer, I just want to throw up one more thing about GlaxoSmithKline, which is that they have a shingles vaccine cause Shingrix that could potentially be approved in 2017 to the tune of several billion dollars in annual sales, if expectations are met. So that could be that revenue driver that gets us to Witty's projections.
Moving on to Pfizer, lest we spend the entire time talking about GlaxoSmithKline, what are some key things to watch out for with Pfizer?
Campbell: One of the things that has me very interested in Pfizer right now is what's going on with their oncology pipeline. We all know that cancer medicine and the demand for cancer medicine. We have a longer-living older population. Cancer is typically something that's identified in patients once they get up toward around 70 years old. The prevalence of cancer is big. This is a big market opportunity. Last quarter, Pfizer nearly doubled its sales in that indication, mostly because of Ibrance, a breast cancer drug that it rolled out in early 2015, that is now on pace to sell about $1.7 billion this year.
Harjes: Yeah, and that would be just flat growth. That's not even accounting for the fact that it'll probably continue to grow at an even faster pace.
Campbell: Right. So, you've got that growing very quickly, and then you also have their other drug, Xalkori, which is a lung cancer drug.
Harjes: Yeah, sales are up 29%.
Campbell: It's growing at a slower pace, but it's still an important drug, as well. So, you have a couple oncology drugs there that are really helping move the needle for the company. If you look at last quarter, Pfizer's top line on an operational basis grew by double-digits, which, in my opinion, is what you want to see. You want to see double-digit topline growth that can be leveraged against lower cost for greater profit growth as we go forward.
Harjes: Yeah. It's not even barely double-digit growth. This is 26% on an operational basis, meaning, taking out your foreign exchange currency hits. That's pretty impressive.
Campbell: Right. Obviously, some of that is going to be because of Hospira. Last year, they bought Hospira, which is a major player in sterile, injectable drugs, big player in biosimilars, which we'll get to in a second, I'm sure. Even if you x-out that impact, you're still talking about 15% operational growth on a stand-alone basis for that company. I think they have more than a half-dozen drugs that grew by double-digits year over year in the most recent quarter.
Harjes: The Hospira acquisition is absolutely a key piece to this puzzle, too. When you look at why Pfizer bought Hospira, it's absolutely a story about biosimilars. However, the legacy injectable franchise actually added $1.2 billion to Q1 revenue. That's something that's also a part of this. Plus, you have tremendous cost savings. Initially, they had projected $800 million in cost savings due to this acquisition, and they actually revised that to say they should hit $1 billion by 2018. That's pretty important, when you're facing patent expirations like Pfizer is.
Campbell: Yeah. It's not chump change at all. Pfizer has a big balance sheet. They have a lot of money. Glaxo does, too. And now that the deal is off with Allergan, it has plenty of room to go out there and do deals, invest in R&D, etc. We talked a little bit about the cancer franchise, but they have a lot of other drugs that are interesting, too. They're partnered up with Bristol-Myers and Eliquis, which is a drug we've talked about on the show previously, an anticoagulant and a factor XA inhibitor. It's winning a lot of business away from Warfarin. It's a big seller, a multibillion-dollar seller.
They have some drugs in the pipeline that are intriguing. They've got a cholesterol-fighting drug that they have an outcome study to see whether or not this cholesterol-lowering drug can actually reduce the number of heart attacks and strokes suffered by patients. Data from that trial could come out next year. They're also working on a checkpoint inhibitor, which would be another cancer drug. The ones that have been approved so far, Bristol-Myers has Opdivo. These are multibillion-dollar drugs.
Harjes: Yeah, there are a lot of irons in the fire with Pfizer. I will point out that one of our Foolish healthcare writers, Sean Williams, wrote an article talking about the loan blemish in Pfizer's quarterly earnings. That was their established products portfolio -- drugs that have already lost patent, which now represent roughly 9% of sales. They're declining rapidly. The GEP unit on the whole actually improved 7% operationally, and that's mostly due to Hospira. But these drugs that have lost patent are really falling off the cliff quite quickly, and that's not going to stop.
I think this has been one of the key issues surrounding Pfizer, is what to do with that portfolio? Of course, if you've been listening to this show, you've heard about the Allergan merger which fell apart. There was a good bit of speculation that one of the key reasons for doing that merger to begin with, was to be able to beef up the different business units of Pfizer to potentially split them off. For me, this is something holding me back on Pfizer -- I'm not quite sure where they're headed with the different business units, and whether they might split them off, whether they might pursue another splashy acquisition. For me, that's a kind of heavy question mark.
Campbell: I think we're supposed to find out by the end of this year whether or not they're going to spin that business out, what they're going to do with it. There's some chatter that they might blend that together with the Hospira business. When they do that, that would increase the value of it to investors.
You look at these two companies, and you say, OK, they're big pharma companies, they have lots of drugs on the market. They're both going to deal with patent expiration, it's just par for the course. A lot of people buy these companies for their dividends. There's no doubt that Glaxo's dividend yield currently is bigger than Pfizer's. Glaxo is yielding about 5.3%, Pfizer is yielding about 3.6%. But when push comes to shove, if I were going to have to put my money on the table and own one of these two companies, I would go with Pfizer. And the reason I would do that is because I'm more concerned about the uncertainty of what's going to happen to that 20% of pharmaceutical revenues when a generic competitor comes on the market. Maybe it will turn out that they'll overcome it. At that point, I'd be more than happy to get on board.
Harjes: Yeah. I would agree that that is a valid concern about Glaxo. I've already pointed out my concern about Pfizer. In comparing the two, I'm glad you brought up the dividend, because that actually puts me on the side of Glaxo. But personally, I'm not actually interested in either of these companies. I think Glaxo might be a better buy for somebody who is really depending on that dividend. That being said, we're going to disagree at The Motley Fool. We embrace a variety of opinions.
Moving on to our next battle royale. Hopefully, we can have a conclusive winner on this one. Let's say you don't want to do the whole big household name, big pharma, big question marks, patent expirations. Instead, you want to buy a big biotech. Two great options would be Biogen and Celgene. These are names that come up a lot when you talk about biotech. But, which one is better? Let's take a look first at Biogen.
Campbell: Biogen has been around a long time. They're absolutely a market leader. They're a huge player in multiple sclerosis. They're a huge market share leader in that indication, and that's a big indication. I think it's a $17 billion -- it's a big market. They've got some of the best-selling drugs associated with that market. I think there's a lot of interest in Biogen, especially because its shares have fallen pretty dramatically in the last year. As a result, you're kind of paying big pharma multiples to own big biotech.
Harjes: Yeah, they're trading for 14x 2016 estimates, which is actually almost on the dot what Pfizer is trading for.
Campbell: Which is pretty funny, when you think about that. Who would have thought, five years ago, that this would be the case? Or, even two years ago? But you have a company here that you could argue is maturing in its indication. It's a market share leader in multiple sclerosis. Other people are trying to angle in and win market share. Novartis has a drug that's winning away share, Gilenya. You have Sanofi with Aubagio. As a result, you have Biogen innovating its own drugs in that indication to hold on to that. The question then becomes, what kind of future growth? You're now protecting your market share, but can you continue to grow your top line in that indication?
Harjes: And that is going to be absolutely pivotal for Biogen. Their multiple sclerosis franchise sales were up just 2.4% year over year, and it does seem like they're losing some market share to their competitors, such as Novartis. Novartis saw 12% growth in their drug Gilenya. Tecfidera, the Biogen drug, their sales are just swelling. And that's its biggest revenue generator, so that's definitely something that investors are concerned about. But, of course, Biogen is also not just going to let competitors just come and swoop up all of their revenue. They're working on their own drug in multiple sclerosis that could actually stop the progression of the disease, which is really interesting, because normally, these drugs just slow the progression.
Campbell: It's such an exciting possibility for patients, the concept of being able to have a treatment that would stop what could be a devastating disease in its tracks. Obviously, that would be a huge win for Biogen in being able to insulate itself against any of these other competitors.
Harjes: And that's not their only moonshot game-changer drug that they're working on. They also have a really intriguing Alzheimer's candidate.
Campbell: Yeah. Alzheimer's, as you and I have discussed previously on this show, is an extremely tough to treat disease. There are no drugs that are approved that can reverse or curb it. They can slow it slightly. But this is a devastating disease, and we need new treatments. Biogen has a phase III study going on right now, couple years out from data, that possibly, maybe, may offer some new hope.
Harjes: Moving on, after the Alzheimer's, I would say the next most intriguing moonshot would be in spinal muscular atrophy, which is another really devastating disease. Biogen is partnered with Ionis Pharmaceuticals in developing a drug that's currently in phase 2. The data looks good so far.
Campbell: So far, so good. With all of these things, though, investors always have to take a step back. There are three P's that I like to focus on when I evaluate whether I like one company better than another. I like to look at product, pipeline, and profitability. If you look at those three P's and bear those out and research them, you say, OK, Biogen has been a very profitable company. It has some great products on the market right now. With the pipeline, you have to take it with a little bit of a grain of salt, because trials do end up falling short. Build that in as you're looking at this, don't necessarily assume that any of these three drugs that you mentioned from Biogen are going to become billion-dollar blockbusters. We just don't know that for sure yet.
Harjes: Yeah, an investment in Biogen at this point is really an investment in the pipeline. I actually need to correct myself really quickly -- the SMA drug that they're developing with Ionis is actually in phase III trials. I misread my notes here, because they have two phase III trials. We'll get data on that next year.
So, Biogen has $6.8 billion in cash. That sounds like a lot, but it's actually not a ton, and they're really relying on their late-stage candidates to come through for growth.
Campbell: They have plenty of cash flow, though. They're generating plenty of cash flow. They're on firm financial ground. I feel pretty good about them in that way. One of the things we haven't talked about yet with this company that I think is worth mentioning is that as they're trying to figure out where their future growth is going to come from, one of the things they'd done is developed two hemophilia drugs. Those hemophilia drugs have been growing sales very rapidly. Well, they've just recently announced that they're going to spin that business out as a separate entity, the hemophilia business. And that is very intriguing to me. It's a very intriguing decision, and it could theoretically be a very intriguing company to own, the spin-out, after it's done. Investors are going to want to keep an eye on how that plays out.
Harjes: For sure. Let's take a quick look at our last company in the battle list, Celgene.
Campbell: It's hard for me to find a better company at monetizing cancer therapies and different therapies. Celgene has proven itself by rolling out a handful of drugs that are becoming top sellers within their indications. I think they would probably be best-known for Revlimid, a multiple myeloma drug that is the most-prescribed therapy in first- and second-line indication for that disease. That drug is going to do, I think, $6.7 billion in sales this year. It's an absolute Goliath. So, yeah, Celgene is a very big company, a very big player in the cancer space, and it has a lot of drivers that I'm sure we'll talk about in a minute.
Harjes: One of my favorite of these drivers is Otezla, which saw growth of 224% year over year to $196 million for the quarter. Otezla is capturing 30% of psoriasis patients that are switching brands or starting therapy, and 42% of psoriatic arthritis patients who are also switching or starting. However, they only have a small fraction of the market for both. To me, that says they have a huge opportunity there to continue growing as they grab these new patients.
Campbell: Autoimmune diseases like psoriasis are huge market opportunities, some of the largest drugs in the world. Remicade, Enbrel, Humira, target treatment of these disease. Otezla is a drug that can be taken orally, however, rather than injected. That's a major advantage. A lot of people will turn to this drug before going to some of these injectables. What's really intriguing about how quickly sales are starting to ramp for this drug is, this is Celgene's first foray into autoimmune diseases like this. It's not like they had a sales team that was ready to go, who could just go, "Hey, go out and start pitching this drug, too." It's been, I think, a very successful drug for them so far. It's still a very young drug. They think this drug has multibillion-dollar potential.
Harjes: One of the other things I find intriguing about Celgene is their partnerships, which they are very generous with. You will find no shortage of different ownership or royalty or collaboration agreements with smaller companies. Do any of them in particular stand out to you?
Campbell: I think one of the ones that people have to focus on right now is Juno Therapeutics. Last year, Celgene cut a deal with Juno to partner up on some of their CAR-T cancer therapies, and Juno could, theoretically, have a drug in front of the FDA in 2017. Celgene owns roughly 10% of Juno Therapeutics' equity. Again, seeing how it's partnered up on what could be a big next generation class of drugs with these CAR-Ts, you should really keep an eye on that, because it could move the needle. But, it's certainly not the only thing that Celgene has going on. Like you mentioned, it has a lot of collaboration that could start to pay off over the course of the next couple years. But it also has some interesting internal drugs that are in the works as well, including, interestingly, a drug for multiple sclerosis that could someday challenge Biogen.
Harjes: That's interesting! So, when you look at this, and you put up Biogen versus Celgene, which is the better buy?
Campbell: This one was a little bit tougher for me than the first battle that we discussed. I'm going to say Celgene, with a caveat. The reason that I say Celgene is because I tend to be a growth investor, and I like double-digit growth. You probably got that impression from listening. Celgene is a company that's still producing 20% annualized sales and profit growth. They think their sales could roughly double to $20 billion by 2020, and generate $13 per share, which would just be remarkable, especially given what you're paying now for share price. However, I really like the idea of owning Biogen, not necessarily 100% because of the potential in MS and those other drugs, but also because I want to get my hands on that spinoff business.
Harjes: That makes sense. Even though Biogen is a cheaper company to own on a valuation basis, Celgene's trading for 18x 2016 earnings, I would also agree that Celgene is the better buy. I actually feel more strongly about that decision than I do about picking Glaxo over Pfizer. That was a little bit tougher of a call for me.
I know that you're a shareholder of Celgene. Looking at today's prices, for a new interim, which of these four companies that we talked about today is the best buy of them all?
Campbell: If you're a growth investor, it's Celgene. If you're a value investor, it's Pfizer.
Harjes: All right, there you have it. I'll add one more thing to that list -- if you're looking for a dividend, that would be Glaxo. But Biogen is a good company, too. We picked a good handful of companies here. Todd, thank you so much for your analysis today. Fool on, everybody!
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Kristine Harjes has no position in any stocks mentioned. Todd Campbell owns shares of Celgene and Mylan. The Motley Fool owns shares of and recommends Celgene and Ionis Pharmaceuticals. The Motley Fool recommends Biogen, Juno Therapeutics, and Mylan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.