2Q Pharma Results Preview: Pfizer, Shire, Merck KGaA, Teva, Novo Nordisk And Allergan

Will They Or Won’t They? The Question On Pfizer’s Investors’ Minds

As Pfizer Inc. prepares to report second quarter sales and earnings Aug. 2, the question on the minds of investors – and just about everyone else in the phama industry – is will the company break up or not. CEO Ian Read has vowed the company will reach a decision on the long-standing question of whether to separate out the innovative pharma business from established products by the end of the year, so until an announcement is officially made, investors will be looking for insights about which way the company is leaning.

Recently, some analysts have begun to shed doubt on the case for a breakup. BMO Capital Markets analyst Alex Arfaei said in a July 21 note that he believes a break up is less likely now because the sum-of-the-parts (SOPT) valuation is no longer compelling. “We now estimate there is less than a 20% probability that Pfizer will announce a split in 2H16,” he said.

Bernstein analyst Tim Anderson expressed a similar sentiment in a July 18 note. “We are increasingly of the view that management is NOT going to pursue a split up, at least at the current point in time,” he said. Anderson also said that a SOTP analysis does not necessarily unlock trapped value, and he said that Pfizer’s growth prospects are stronger today than they were five years ago, when investors were originally pushing management to consider the move. (Also see "Could Pfizer Choose To Consciously Stay Coupled?" - Scrip, 18 Jul, 2016.)

“This again begs the question, why bother to split,” Anderson said. A decision against a split could lead to near-term volatility in the stock. Investors will certainly be listening in for any clues.

Shire's Prospects In Hemophilia A Key Question

With the closing of Shire PLC's buyout of Baxalta Inc., the question of how the growing hemophilia franchise is faring will be a central focus on the firm's second quarter earnings call on Aug. 2. (Also see "Shire's Ornskov Maps Out Future Prospects Post- Baxalta Merger" - Scrip, 6 Jun, 2016.)

In a July 27 note, BTIG Equity Research analyst Timothy Chiang said Shire was poised for a starring role at the World Federation of Hemophilia conference, held July 24-28 in Orlando. Feedback on data presentations for hemophilia A drugs Adynovate and Advate – both recombinant factor VIII products – has been positive. (Also see "Shire Backs Hemophilia Focus With Asset Updates, Irish iPATH Study" - Scrip, 27 Jul, 2016.) Chiang predicted the acquisition of Baxalta could make hematology a $4bn franchise for Shire in 2017, with hemophilia accounting for about 77% of that revenue.

Hemophilia also is a market featuring high barriers to entry, the analyst wrote, meaning Shire could be well-insulated against potential future competitors.

"While we believe there is significant potential competition that could occur as new agents (e.g., Roche/Chugai's ACE910, in Phase III trials) enter the market, the high barriers to entry in the hemophilia market lead us to think that Shire will likely remain a top 3 global player in the blood plasma market," Chiang said. "We believe Shire has a sizeable plasma collection infrastructure along with key manufacturing capabilities which are hard to replicate. High capital expenditures are required, which could limit the number of new entrants into this segment."

Rebif US Sales, Oncology Pipeline To Dominate German Merck's Update

German conglomerate Merck KGAA unveils second quarter results Aug 4 with analysts focused on how well pricing for its top-selling MS drug Rebif held up in the key US market during the period, and for fresh news about the group's ongoing pipeline revamp.

Merck – a multinational pharma, life sciences and chemicals combination – has been rebuilding its pharma R&D organization and realigning its healthcare businesses to focus on neurology, oncology, immuno-oncology and immunology, while expanding its footprint in emerging markets. (Also see "German Merck Aims To Lift Its UK R&D Efforts, Despite Brexit Uncertainty" - Scrip, 25 Jul, 2016.) In so doing, the family-controlled conglomerate has moved to reduce its reliance on Rebif (interferon beta-1a), used to treat relapsing forms of multiple sclerosis. Still, analysts say Rebif sales in the US have performed ahead of expectations as volume losses to oral drugs have started to moderate and the German company has successfully followed the price rises of its competitors.

The company is also reaping further benefits in the US for its infertility therapy Gonal-f (follitropin injection) for follicle stimulation after the loss of a competitor, Ferring Pharmaceuticals Inc., in the recombinant follicle-stimulating hormone (rFSH) market, which allowed it to grow its Gonal-f franchise by 17% organically in 2016's first quarter. Analysts think this benefit will flow through into the latest three months and potentially beyond.

Meanwhile Merck, which has not had any new product launches for many years, is betting heavily on its investigational therapy avelumab being the second PD-L1 targeted product on the US market, trailing Roche/Genentech's Tecentriq (atezolizumab) which was approved by the FDA in May for use in bladder cancer four months ahead of schedule, as well as the pioneering PD-1 inhibitors Opdivo (nivolumab) and Keytruda (pembrolizumab). Avelumab is currently in Phase III for use in second-line non-small cell lung cancer, which is progressing as planned. (Also see "German Merck Identifies Pipeline Stars, Plots Course Through A Dynamic Cancer Space" - Scrip, 29 Jun, 2016.)

Another product Merck is banking on is cladribine tablets, the oral multiple sclerosis medicine it suspended in late-stage trials five years ago but then resuscitated last September after having evaluated new data and done additional analyses of the product's benefit-risk profile. (Also see "Merck KGaA's Cladribine Revival Smacks Of Desperation " - Scrip, 11 Sep, 2015.)

Will Novo's 2Q Financials Match Up To R&D Feats?

The second quarter of 2016 was an exciting time for Novo Nordisk AS in terms of clinical trial results, particularly the reporting of cardiovascular outcomes data from the LEADER trial for blockbuster diabetes drug Victoza (liraglutide) – but analysts and investors will be waiting to see if the Danish firm's financial performance for the period can match up with its research successes. (Also see "ADA: Victoza's 'Broad' CV Benefit Leads The Way For Semaglutide" - Scrip, 13 Jun, 2016.)

Novo Nordisk's earnings call on Aug 7 might also provide a platform for it to respond publically to continued US payer resistance against making Victoza a preferred option on their formularies, despite the drug's strong CVOT data. Furthermore, if Exec VP and Chief Scientific Officer Mads Krogsgaard Thomsen's sheer enthusiasm for the once-weekly injectable GLP-1 semaglutide at the American Diabetes Association's annual conference is anything to go by, Novo Nordisk's 2Q discussion is likely to focus on upcoming milestones for this next-generation Victoza product. (Also see "Novo's CSO Has A Lifetime Product Plan For Diabetes Patients" - Scrip, 18 Jul, 2016.)

Consensus expectations have placed 2016 full year EPS for Novo Nordisk at DKK15.34 ($2.26) per share, up from a 2015 price of DKK13.56 per share. Sales by the end of the year are also anticipated to beat 2015's performance with a CAGR of 9.6% – reaching DKK115bn compared to DKK107.9bn in 2015. Second quarter earnings will be a good steer on whether Novo Nordisk can reach these higher targets by the year end. EPS for 2Q 2016 is estimated to come in at DKK3.89 per share.

Copaxone Concerns And Divestment Decisions At Teva

Allergan PLC's and Teva Pharmaceutical Industries Ltd.'s second-quarter earnings results on Aug. 4 and Aug. 8, respectively, will coincide with the closing of the Israeli company's $40bn acquisition of Allergan's generic drug unit, which was finally cleared by the Federal Trade Commission July 27. (Also see "Teva Embarks On New Phase With FTC Clearance Of Allergan Generics" - Scrip, 27 Jul, 2016.)

Tension had been rising with concerns over a potential hang up after the timeline for closing the deal was pushed back several times. Management had insisted all along that the closing was on track, but a question mark was hanging over how many products the FTC might require Teva to divest before clearing the union. It turned out that the FTC's blessing came at a high price: substantial divestments are required, including the sale of 79 pharmaceutical products to 11 different firms. The agency's action was significantly greater than Teva originally anticipated.

Berenberg analysts promptly removed $1.1bn of sales and $600m of EBITDA from its Teva forecasts, citing the new divestments and also a poor Q1 for some of the remaining products. They also revised the timing of any synergy realization.

In addition, the analysts are concerned that Teva has "rather bizarrely" excluded the impact of generics to its Copaxone 40 mg product. "This presents the risk that the outlook may be materially downgraded at some point in the future," they warn. Analysts are also worried about a weakness in Teva's specialty business following, as Berenberg put it, "the indiscriminate sell-off in specialty pharma that has occurred through 2016."

It will be interesting to see how management tackles these concerns during the second quarter presentation.