Stockwatch: Earnings Season Inevitabilities

Companies in the industry have a lot to prove this quarter, given the backdrop of a corporate restructuring at Merrimack Pharmaceuticals Inc. that included the departure of its CEO and was in response to sluggish sales of its closely watched oncology drug Onivyde (liposomal irinotecan), the failure of AstraZeneca PLC's Brilinta (ticagrelor) anticoagulant to show a cardiovascular benefit over clopidogrel in peripheral artery disease, and the reduction of Horizon Pharma PLC's full-year sales and earnings guidance. Even with reasonable results it seems that investors might have already written off healthcare for the rest of the year.

Nevertheless, as third-quarter earnings season got under way last week, the news was not as bad as had been foreshadowed by earlier pre-announcements (Also see "Stockwatch: Third-Quarter Earnings Portents" - Scrip, 17 Oct, 2016.), and the negative response from investors was probably forward-looking.

Everyone looks to Johnson & Johnson's (J&J) quarterly earnings announcement to set the tempo for life science earnings season. In the event J&J did not disappoint, with sales and earnings marginally beating analysts' consensus estimates.

Strong performances at its pharmaceutical division and encouragingly at its consumer division offset the continuing underperformance of J&J's medical device and diagnostics division. That encouraging quarterly performance along with the maintenance of its full-year sales guidance and the raising of its full-year earnings expectations should have been enough to calm J&J's investors' nerves and infuse a warm glow throughout the sector. However, J&J's share price traded down about 2% on the announcement and ended the day down about 0.7%. The reason for J&J's share price gloom had nothing to do with its quarterly results but rather the announcement of Pfizer Inc.'s intention to launch a biosimilar version of J&J's Remicade (infliximab) before the end of November. This must have been particularly galling to J&J as the recent strength in its pharmaceutical division was due in part to strong quarterly sales of Remicade. Last quarter J&J fiercely maintained its full-year guidance and its expectations of no Remicade biosimilar competition but in the 15 hours between Pfizer's announcement and J&J's results, it must have changed that stance to expectations of "modest" biosimilar competition, coming into line with the analysts from JP Morgan whose expectations since earlier this year were for a fourth-quarter Inflectra (infliximab) launch. (Also see "J&J Maintains Strategy For Biosimilar Remicade As Inflectra Nears" - Scrip, 18 Oct, 2016.)

If I thought that J&J had been a little hard done by in the response of investors to its financial results, Swiss cardiovascular company Actelion Pharmaceuticals Ltd. seemed to have been treated even more unfairly. Actelion's share price fell by about 6% on the day of its third-quarter results announcement despite those results being described as "strong" by most of the analysts' reports I read. Like J&J, sales and earnings beat consensus estimates and were driven by the newly launched product for pulmonary hypertension (PAH) Opsumit (macitentan) and its predecessor Tracleer (bosentan). For the second successive quarter Actelion raised earnings guidance, and while some of this bravado was due to a lower tax rate and a 3% currency benefit, those one-off benefits seemed unlikely causes of the stock price sell-off. More logically, the stock price of Actelion's closest competitor in the PAH space, United Therapeutics Corp., dropped over 4% on the day of Actelion's announcement as investors translated growth in Actelion's PAH market share into a decline in United Therapeutics' share. This non-zero sum sell-off in both companies’ share prices probably had more to do with Actelion not guiding to a further delay in generic Tracleer which is likely to affect the profitability of all PAH specialists. Like J&J with Remicade, Actelion had appeared to be doing a sterling job of fending off generic competition by dragging its feet in licensing Tracleer's risk evaluation and mitigation strategy (REMS) program to generic companies. (Also see "Stockwatch: Earnings Season Appears Not At Home To Brexit" - Scrip, 25 Jul, 2016.) However, also like J&J with Remicade, generic competition will happen eventually and Actelion investors are probably aware of the legal battles between Celgene Corp. and Mylan NV over the REMS program for generic thalidomide that hint at the inevitability of generics. (Also see "REMS “Abuses” Concern FDA, But Can Scolding Help Speed Generic Entry?" - Pink Sheet, 4 Mar, 2015.)

Actelion's Swiss compatriot Roche completed the opening salvo of early life science financial reporters last week, but unlike J&J and Actelion, Roche modestly missed analysts' consensus expectations of sales, although it maintained full-year guidance. In a diametrically opposed version of J&J's results, a weak performance in Roche's pharmaceuticals division was partly compensated for by its smaller diagnostics division. Like Actelion, Roche was helped by a weaker reporting currency but its share price still finished the day down only modestly, probably in anticipation of the future sales of its recently launched PD-L1 inhibitor Tecentriq (atezolizumab) in oncology.

There was more yang than yin in the opening reports of third-quarter earnings season, so perhaps the uncertainty of the US presidential election and the wariness of less robust financial results to come are behind the apparently harsh reactions to last week's announcements.

Andy Smith gives an investor's view on life science companies. He has been lead fund manager for four life science–specific funds, including 3i Bioscience, International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the techMark Technology Fund Manager of the year for 2007.